The graph on the left shows the short-run marginal cost curve for a typical firm selling in a perfectly competitive industry. The graph on the right shows current industry demand and supply.

Question

a. What is the marginal revenue that this perfectly competitive firm will earn on its 60th unit of output?
b. What level of output should this firm produce in order to maximize profit or minimize losses? (This isn’t two questions; the same level of output would do either.)
c. Given your answer to question (b) above, assume that ATC at that level of output is $10. What are the firm’s profits?
d. Now assume that the firm produces 100 units of output and at that level of output ATC = $11. How many firms in total will there be in this market?
e. Finally, assume the firm produces 100 units of output and at that level of output its ATC are $13 but its AVC are $11. What should the firm do and why?

Answer 1

a. What is the marginal revenue that this perfectly competitive firm will earn on its 60th unit of output?

The graph on the right side illustrates a demand curve, which intersects at a price level of $12 per unit. This is equilibrium price. In case of perfectly competitive firm, marginal revenue is equal to market price. So, Marginal Revenue at 60th units = $12.

b. What level of output should this firm produce in order to maximize profit or minimize losses? (This isn’t two questions; the same level of output would do either.)

The firms demand = MR = P is a horizontal line at $12. The firm will produce 100 units of output where SMC = $12.

c. Given your answer to question (b) above, assume that ATC at that level of output is $10. What are the firm’s profits?

Total Cost = ATC * output level = 10 * 100 = $1000
Total Revenue = Price * output = 12 * 100 = $1200
Profit = Total Revenue - Total Cost = 1200 – 1000 = $200
Firm profit is $200.

d. Now assume that the firm produces 100 units of output and at that level of output ATC = $11. How many firms in total will there be in this market?

Refer to demand and supply curve, we get equilibrium output level is 5000 units.
Number of firms = Total output / output of single firm = 5000 / 100 = 50
There will be 50 firms in the market

e. Finally, assume the firm produces 100 units of output and at that level of output its ATC are $13 but its AVC are $11. What should the firm do and why?

In case of short run, a firm will continue to produce of AVC is less than price. In the given case,
AVC = $11
Price = $12
Since AVC < Price, firm should continue to produce.