SM14ce_Micro_Chap009.doc

Chapter 9 - Perfect Competition in the Short Run Chapter 9 - Perfect Competition in the Short Run McConnell Brue Flynn Barbiero 14ce DISCUSSION QUESTIONS 1. Briefly state the basic characteristics of perfect competition, perfect monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case justify your classification. LO9.1 Answer: Perfect competition: very large number of firms; standardized products; no control over price: price takers; no obstacles to entry; no non-price competition. Monopoly: one firm; unique product: with no close substitutes; much control over price: price maker; entry is blocked; mostly public relations advertising. Monopolistic competition: many firms; differentiated products; some control over price in a narrow range; relatively easy entry; much non-price competition: advertising, trademarks, brand names. Oligopoly: few firms; standardized or differentiated products; control over price circumscribed by mutual interdependence: much collusion; many obstacles to entry; much non-price competition, particularly product differentiation. (a) Hometown supermarket: oligopoly. Supermarkets are few in number in any one area; their size makes new entry very difficult; there is much non-price competition. However, there is much price competition as they compete for market share, and there seems to be no collusion. In this regard, the supermarket acts more like a monopolistic competitor. Note that this answer may vary by area. Some areas could be characterized by monopolistic competition while isolated small towns may have a monopoly situation. (b) Steel industry: oligopoly within the domestic production market. Firms are few in number; their products are standardized to some extent; their size makes new entry very difficult; there is much non-price competition; there is little, if any, price competition; while there may be no collusion, there does seem to be much price leadership. (c) Kansas wheat farm: perfect competition. There are a great number of similar farms; the product is standardized; there is no control over price; there is no nonprice competition. However, entry is difficult because of the cost of acquiring land from a present proprietor. Of course, government programs to assist agriculture complicate the purity of this example. (d) Commercial bank: monopolistic competition. There are many similar banks; the services are differentiated as much as the bank can make them appear to be; there is control over price (mostly interest charged or offered) within a narrow range; entry is relatively easy (maybe too easy!); there is much advertising. Once again, not every bank may fit this model—smaller towns may have an oligopoly or monopoly situation. (e) Automobile industry: oligopoly. There are the Big Three automakers, so they are few in number; their products are differentiated; their size makes new entry very difficult; there is much non-price competition; there is little true price competition; while there does not appear to be any collusion, there has been much price leadership. However, imports have made the industry more competitive in the past two decades, which has substantially reduced the market power of the U.S. automakers. 2. Strictly speaking, perfect competition is relatively rare. Then why study it? LO9.2 Answer: It can be shown that perfect competition results in lowcost production (productive efficiency)—through longrun equilibrium occurring where P equals minimum ATC—and allocative efficiency—through longrun equilibrium occurring where P equals MC. Given this, it is then possible to analyze real world examples to see to what extent they conform to the ideal of plants producing at their points of minimum ATC and thus producing the most desired commodities with the greatest economy in the use of resources. 3. “Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? Under what condition(s)? LO9.5 Answer: Yes, a firm may want to stay in business even if it is losing money. For example, assume the firm has a fixed cost of $1,000 which it must pay even if it stops production. Now assume that average variable cost is $10 per unit and price of the product is $15 per unit. Finally assume that output equals 100 units using the MR=MC rule. This implies total revenue equals $1,500, variable cost equals $1,000, and total cost equals $2,000 (the sum of variable and fixed cost). The firm is losing money because profit equals -$500 (=$1500 - $2000). However, this loss is less than the fixed cost it would incur in the short run if it shut down, which equals a $1,000. Thus, it is better to stay in business and lose $500 rather than close down and lose a $1000 in the short run. In conclusion, as long as price exceeds the average variable cost the firm should produce in the short run given fixed cost are present by definition. 4. Consider a firm that has no fixed costs and that is currently losing money. Are there any situations in which it would want to stay open for business in the short run? If a firm has no fixed costs, is it sensible to speak of the firm distinguishing between the short run and the long run? LO9.5 Answer: No, the firm will want to shut down. This follows because the firm is losing money, but there are no fixed costs. Since there are no fixed costs, only variable cost, revenue must be less than total variable cost or price is less than average variable cost (the shut-down rule). In other words, the firm can shut down and lose nothing because there are no fixed costs or it can keep producing and earn a negative profit. In a more general sense, a firm with no fixed cost is really in the long run. By definition, the short run implies there are fixed cost present that the firm cannot get of paying either implicitly or explicitly. The long run implies all factors and costs can adjust to the economy. 5. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is perfectly competitive. LO9.5 Answer: If the last unit produced adds more to costs than to revenue, its production must necessarily reduce profits (or increase losses). On the other hand, profits must increase (or losses decrease) so long as the last unit produced—the marginal unit—is adding more to revenue than to costs. Thus, so long as MR is greater than MC, the production of one more marginal unit must be adding to profits or reducing losses (provided price is not less than minimum AVC). When MC has risen to precise equality with MR, the production of this last (marginal) unit will neither add nor reduce profits. In perfect competition, the demand curve is perfectly elastic; price is constant regardless of the quantity demanded. Thus MR is equal to price. This being so, P can be substituted for MR in the MR = MC rule. (Note, however, that it is not good practice to use MR and P interchangeably, because in imperfectly competitive models, price is not the same as marginal revenue.) 6. “That segment of a competitive firm’s marginal-cost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm.” Explain using a graph and words. LO9.6 Answer: The firm will not produce if P < AVC. When P > AVC, the firm will produce in the short run at the quantity where P (= MR) is equal to its increasing MC. Therefore, the MC curve above the AVC curve is the firm’s short-run supply curve, it shows the quantity of output the firm will supply at each price level. See Figure 10.6 for a graphical illustration. The LAST WORD If a firm's current revenues are less than its current variable costs, when should it shut down? If it decides to shut down, should we expect that decision to be final? Explain using an example that is not in the book. Answer: The firm should shut down immediately. If the firm were to continue production in this case it would be adding to its losses. That is, not only would the firm have to pay for its fixed cost it would also be paying more for the variable costs in excess of revenue. In this case, it is best for the firm to just to shut down and take the loss on the fixed cost (minimize losses). However, this may only be a temporary case. If the price of the product were to rise then the revenue may be sufficient to cover the variable costs. The firm will once again start production because they can start to fill the financial hole generated by the fixed costs. Examples will vary. REVIEW QUESTIONS 1. Suppose that the paper clip industry is perfectly competitive.  Also assume that the market price for paper clips is 2 cents per paper clip.  The demand curve faced by each firm in the industry is: LO9.3 a. A horizontal line at 2 cents per paper clip. b. A vertical line at 2 cents per paper clip. c. The same as the market demand curve for paper clips. d. Always higher than the firm’s MC curve. Answer: a. A horizontal line at 2 cents per paper clip. In any perfectly competitive industry, the demand curve faced by an individual firm is a horizontal line at the market equilibrium price.  This is because in a perfectly competitive industry each firm's output is too small to affect the overall market equilibrium price.  Thus, each firm can sell as many or as few units of output as it pleases without affecting the market equilibrium price. In the case of the paper clip industry used in this question, each firm can sell as many or as few paper clips as it wishes at the market equilibrium price of 2 cents per paper clip.  That is equivalent to each firm perceiving demand to be a horizontal line at a price of 2 cents per paper clip because whether the firm produces one paper clip or many, it will always be able to see the amount it produces for 2 cents per paper clip.  Thus, from the perspective of each individual firm, there is no trade-off between the amount it wishes to sell and the price at which it can sell.  The demand curve perceived by each individual firm will be horizontal. By contrast, the overall market demand curve will still be downward sloping, so that there will still be an inverse relationship between the total amount that the industry produces and the price of paper clips.  For the overall market demand curve, the more firms produce, the lower the price per paper clip.  That is, the overall market demand curve will be downward sloping. 2. Use the following demand schedule to determine total revenue and marginal revenue for each possible level of sales: LO9.3 a. What can you conclude about the structure of the industry in which this firm is operating? Explain. b. Graph the demand, total-revenue, and marginal-revenue curves for this firm. c. Why do the demand and marginal-revenue curves coincide? d. “Marginal revenue is the change in total revenue associated with additional units of output.” Explain verbally and graphically, using the data in the table. Answer: Table: Product Price ($) Quantity Demanded Total Revenue ($) Marginal Revenue ($) 2 0 0 NA 2 1 2 2 2 2 4 2 2 3 6 2 2 4 8 2 2 5 10 2 a. The industry is perfectly competitive—this firm is a “price taker.” The firm is so small relative to the size of the market that it can change its level of output without affecting the market price. b. See graph. c. The firm’s demand curve is perfectly elastic; MR is constant and equal to P. d. True. When output (quantity demanded) increases by 1 unit, total revenue increases by $2. This $2 increase is the marginal revenue. Figure: The change in TR is measured by the slope of the TR line, 2 (= $2/1 unit). 3. A perfectly competitive firm whose goal is to maximize profit will choose to produce the amount of output at which: LO9.4 a. TR and TC are equal. b. TR exceeds TC by as much as possible. c. TC exceeds TR by as much as possible. d. None of the above. Answer: b. TR exceeds TC by as much as possible. A perfectly competitive firm that wishes to maximize profit will choose to produce the amount of output at which TR exceeds TC by as much as possible. That is because profit is the difference between TR and TC. Stated algebraically, Profit = TR – TC. Consequently, a competitive firm’s profit will be maximized when TR exceeds TC by as much as possible. Note, however, that it is possible that a firm facing difficult circumstances could find itself in the very unfortunate position of never being able to make a profit. That can happen if TR < TC at every possible output level. In such situations, the firm will always lose money. But it will attempt to lose as little money as possible. That will be done by choosing the output level at which the loss is as small as possible. As explained in this section, it will either shut down production and produce zero units of output (if the price is less than minimum AVC) or produce the amount of output at which MR = MC (if price exceeds minimum AVC). It will undertake whichever of those two options produces the smaller loss. 4. If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which: LO9.5 a. MR < MC. b. MR = MC. c. MR > MC. d. none of the above. Answer: b. MR = MC. First, keep in mind that depending upon its circumstances; it may be better for a firm to shut down production and produce zero units of output than for it to produce a positive amount of output. This will be true in cases where the firm is facing losses AND those losses would be smaller if it shut down production than if it produced a positive amount of output. In such situations, the firm that shuts down production will lose only the amount of its fixed costs. By contrast, in such situations, the firm would lose even more if it produced a positive amount of output. That is why, in such situations, the firm will prefer to shut down and produce nothing and thereby only lose the value of its fixed costs rather than producing a positive amount of output and losing even more money. On the other hand, it may be possible for a firm facing better circumstances to either make a positive profit or generate a loss that is smaller than the fixed-cost loss that it would incur if it shut down production. In such situations, the firm will do as well as it possibly can if it chooses to produce the amount of output at which MR = MC. That amount of output will either maximize the firm’s profit (if it is possible for the firm to make a profit) or minimize the firm’s loss (if the firm must make a loss). 5. A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _____________ and should _______________ production. LO9.5 a. profit; increase b. profit; shut down c. loss; increase d. loss; shut down Answer: d. loss; shut down. This firm is making a loss and should shut down production. We know that it is making a loss because the market price at which it can sell its batteries is less than the minimum AVC. That implies that its revenue per battery is not even high enough to cover the variable cost of producing its output. But the situation is even worse because each month the firm has $10,000 in fixed costs. So if the firm produces output, not only will it be failing to cover the variable cost of producing output, it will also be failing to cover its fixed cost of producing output. The firm should shut down immediately and produce nothing because producing nothing will minimize the size of its loss. That is because if it produces nothing, it will only lose $10,000 per month, the value of its fixed cost. By contrast, if it continues to produce output, it will lose not only its fixed cost but also an additional amount because its revenues are not even high enough to cover the variable cost of producing output. Thus, it would lose less money if it shut down production than if it continued producing output. Better to lose just the fixed-cost amount of $10,000 per month rather than an even larger amount! 6. Consider a profit-maximizing firm in a competitive industry. For each of the following situations, indicate whether the firm should shut down production or produce where MR = MC. LO9.5 a. P < minimum AVC. b. P > minimum ATC. c. Minimum AVC < P < minimum ATC. Answers: a. The firm should shut down production because in this price range (P < minimum AVC) the firm would always lose less money by shutting down than by producing output. This is true because shutting down would result in a loss equal to the firm’s fixed cost while producing any positive amount of output would lose the firm even more money. b. The firm should produce where MR = MC because in this price range (P > minimum ATC) the firm will maximize profits by choosing to produce the amount of output at which MR = MC. Note that with the price higher than minimum ATC, the firm is guaranteed to make a profit. The only question is how much output to produce in order to maximize that profit. The answer is given by the MR = MC rule, which tells us that in any situation in which producing is preferable to shutting down, a competitive firm will do as well as it possibly can if it produces where MR = MC. c. The firm should produce where MR = MC because in this price range (minimum AVC < P < minimum ATC) the firm will minimize its loss by producing where MR = MC. To see why this is the case, first note that because the price is less than minimum ATC, the firm will be forced to make a loss. But we know that because price exceeds minimum AVC, the firm will not want to shut down. The question then is how much to produce. The answer is given by the MR = MC rule, which tells us that in any situation in which producing is preferable to shutting down, a competitive firm will do as well as it possibly can if it produces where MR = MC. In this case where the firm will be forced to take a loss, the size of that loss will be minimized by producing the amount of output at which MR = MC. PROBLEMS 1. A perfectly competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all successive units. Does price exceed average variable cost for the first 50 units? What about for the first 100 units? What is the marginal cost per unit for the first 50 units? What about for units 51 and higher? For each of the first 50 units, does MR exceed MC? What about for units 51 and higher? What output level will yield the largest possible profit for this perfectly competitive firm? (Hint: Draw a graph similar to Figure 10.2 using data for this firm.) LO9.5 Answer: Yes; Yes; the MC per unit is $10 per unit for the first 50 units; the MC per unit is $25 per unit for subsequent units; Yes, MR > MC; For units 51 and up, MR < MC; Producing 50 units will maximize profit. Feedback: Consider the following example. A perfectly competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all successive units. Does price exceed average variable cost for the first 50 units? Yes, price ($20) exceeds average variable cost for the first 50 units since AVC for the first 50 units is $10 per unit [= ($10 per unit X 50 units)/50 units]. What about for the first 100 units? Yes, price ($20) exceeds average variable cost for the first 100 units since AVC for the first 100 units is $17.50 per unit [= ($10 per unit X 50 units + $25 per unit X 50 units)/100]. What is the marginal cost per unit for the first 50 units? What about for units 51 and higher? For each of the first 50 units, does MR exceed MC? What about for units 51 and higher? The MC is $10 per unit for the first 50 units and the MC is $25 per unit for subsequent units. For each of the first 50 units, MR > MC since $20 > $10 and for units 50 and up, MR < MC since $20 < $25. What output level will yield the largest possible profit for this perfectly competitive firm? The firm will produce 50 units to maximize profit because the MC of the 51st unit exceeds marginal revenue. 2. A wheat farmer in a perfectly competitive industry can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on. Draw a table with multiple columns to help you answer the following questions. How many bushels will each of the farmer’s five acres produce? How much revenue will each acre generate? What are the TR and MR for each acre? If the marginal cost of planting and harvesting an acre is $7,000 per acre for each of the five acres, how many acres should the farmer plant and harvest? LO9.5 Answers: The student should end up constructing a table similar to the following. The farmer should plant and harvest four acres. Feedback: Consider the following example. A perfectly competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on. Also assume the marginal cost of planting and harvesting an acre is $7,000 per acre for each of the five acres. Table: The first step is to calculate the revenue generated by each acre (column 3). Each entry, the acre's revenue, is found by multiplying the price per bushel by the acre's yield. The revenue generated by the first acre is $10,000 (=$10 x 1,000), the second acre $9,000 (=$10 x 900), the third acre $8,000 (=$10 x 800), etc... The next step is to calculate total revenue (column 4). Total revenue equals the sum of revenue generated by each successive acre being cultivated. Total revenue for the first acre is $10,000, total revenue for first and second acre is $19,000 (=$10,000 + $9,000), total revenue for the first, second, and third acre is $27,000 (= $10,000 +$ 9,000 + $8,000), etc... The final step is to calculate marginal revenue (column 5). Marginal revenue equals the change in total revenue as each successive acre is cultivated. Marginal revenue for the first unit is $10,000 because as we move from cultivating zero acres to one acre out total revenue changes by $10,000. The marginal revenue for the second acre equals $9,000, which is the total revenue of the second acre minus the revenue generated by the first acre (=$19,000 - $10,000). etc... Using our MC=MR rule, the farmer should plant and harvest 4 acres. Marginal revenue for the fourth acre equals $7,000 and the marginal cost equals $7,000. 3. Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? 2,000? 10,000? What is her ATC per poster if she prints 1,000? 2,000? 10,000? If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately? LO9.5 Answers: AFC per poster is $0.25 for 1,000; $0.125 for 2,000; $0.025 for 10,000. ATC per poster is $1.25 for 1,000 posters; $1.025 for 2,000 posters; and $0.805 for 10,000. Shutdown is determined by AVC. The AVC per poster for more than 2,000 posters is $0.75 per poster, so Karen will shut down if the price falls to 70 cents per poster. Feedback: Consider the following example. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? 2,000? 10,000? To calculate average fixed cost (AFC) divide total fixed cost by the number of posters being produced (=Total Fixed Cost / # of posters). Therefore, her AFC for a 1,000 posters is $0.25 (=$250/1,000), for 2,000 posters $0.125 (=$250/2,000), and for 10,000 posters $0.025 (=$250/10,000). What is her ATC per poster if she prints 1,000? 2,000? 10,000? Before we calculate the average total cost (ATC) per poster we need to find the average variable cost (AVC) per poster using the information above. The AVC is found by dividing the total variable cost by the number of posters produced. AVC for 1,000 posters is $1.00. This is the total variable cost of $1,000 divided by the number of posters, 1,000 (=$1,000/1,000). AVC for 2,000 posters is $0.90. This is the total variable cost $1,800; $1,000 for the first 1,000 and $800 for the second 1,000, divided by the total number of posters 2,000 (=$1,800/2,000). AVC for 10,000 posters is $0.78. This is the total variable cost of 7,800; $1000 for the first 1,000; $800 for the second 1,000; and $6,000 for the next 8,000 ($750 per 1,000 or 8x$750), divided by 10,000 posters (=$7,800/10,000). Now we can find her ATC, which equals the sum of her average fixed cost and her average variable cost (=AFC+AVC). ATC for 1,000 posters is $1.25 (=$0.25 + $1.00). ATC for 2,000 posters is $1.025 (=$0.125 + $0.90). ATC for 10,000 is $0.805 (=$0.025 + $0.78). Since the price is 70 cents per poster Karen will shut down because average variable cost never falls below or is equal to 70 cents per poster. 4. Assume the following cost data are for a perfectly competitive producer: LO9.5 a. At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize per unit of output? b. Answer the questions of 4a assuming product price is $41. c. Answer the questions of 4a assuming product price is $32. d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3). e. Now assume that there are 1,500 identical firms in this competitive industry; that is, there are 1,500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4). f. Suppose the market demand data for the product are as follows: What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run? Answer: (a) Yes; 8 units; the total economic profit equals $62.96. (b) Yes; 6 units; the total economic profit (loss) equals -$39.00. (c) The firm will not produce; the firm shuts down and incurs the loss of $60.00 (fixed cost). (d) and (e) (1) Price (2) Quantity supplied, single firm (3) Profit (+) or loss (-) (4) Quantity supplied, 1500 firms $26 32 38 41 46 56 66 0 0 5 6 7 8 9 $-60 -60 -55.00 -39.00 -7.98 62.96 144.00 0 0 7500 9000 10500 12000 13500 (f) $46; 10,500; 7 units; per-unit loss is -$1.14; the loss per firm is -$7.98; industry will contract. Feedback: Part a: The rule is to produce at the level of output where Marginal Revenue equals (or is greater than if we are using integers) Marginal Cost as long as revenue is sufficient to cover fixed cost (Price is greater than Average Variable Cost). In the case above the market is competitive so Marginal Revenue equals the price of $56. From the table above we see that the marginal cost for the 8th unit is $55 and the marginal cost of 9th unit is $65. The firm will want to produce 8 units where the marginal revenue of $56 is greater than the marginal cost of $55. For the 9th unit of output this is not the case. We also need to verify that price exceeds average variable cost at this level of production. The answer is yes, average variable cost is $40.63 which is less than the price of $56. At this level of production the firm will earn a positive economic profit per unit of $7.87 (= $56 (price of product) - $48.13 (average total cost for the 8th unit). The total economic profit equals $62.96 (=8 (number of units sold) x $7.87 (profit per unit)). Part b: The same process is applied here. The price of $41, which is marginal revenue, is greater than the marginal cost of the 6th unit in the table above. Beyond this level of production marginal cost exceeds marginal revenue. Thus, the firm will produce 6 units as long as price covers average variable cost. The average variable cost for 6 units is $37.50, which is less than the price. The firm will produce the 6 units of output. At this level of production the firm will earn a negative economic profit per unit or loss per unit of -$6.50 (= $41 (price of product) - $47.50 (average total cost for the 6th unit). The total economic profit (loss) equals -$39.00 (=6 (number of units sold) x (-$6.50) (loss per unit)). Part c: We could go through the same exercise here. However, by recognizing that the price of $32 is below average variable cost at all levels of production the firm will not produce. Thus, the firm shuts down and incurs the loss of $60.00 (fixed cost). Part d and e: (1) Price (2) Quantity supplied, single firm (3) Profit (+) or loss (-) (4) Quantity supplied, 1500 firms $26 32 38 41 46 56 66 0 0 5 6 7 8 9 $-60 -60 -55.00 -39.00 -7.98 62.96 144.00 0 0 7500 9000 10500 12000 13500 Part f: To determine the equilibrium price we look at the total quantity demanded schedule and the total quantity supplied schedule (for the 1,500 firms above) to find the price where quantity demanded equals quantity supplied. This occurs at the price of $46 where quantity demanded = 10,500 and quantity supplied = 10,500. The quantity 10,500 is the equilibrium output for the industry. Note that at prices below $46 quantity demanded exceeds quantity supplied and at prices above $46 quantity supplied exceeds quantity demanded. The equilibrium output for each firm is 7 units (= 10,500 (industry output)/ 1,500 (number of firms)). Since the equilibrium price of $46 is below the average total cost for 7 units of output at the firm level there will be a loss. The per-unit loss for the firm is -$1.14 (= $46 (price) - $47.14 (average total cost for 7 units)). The loss per firm is -$7.98 (= 7 units produced) x (-$1.14) (loss per unit)). This industry will contract due to the negative economic profit (or economic loss). 9-12 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.