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miks miks
wrote...
Posts: 346
6 days ago

Question 1.

If a perfectly competitive firm's total revenue is less than its total variable cost, the firm



should raise its price above its average variable cost.



should adopt new technology in order to lower its costs of production.



should stop production by shutting down temporarily.



should continue to produce and increase its demand.



Question 2.

Figure 12-18




Use the figure above to answer the following questions.

a.

How can you determine that the figure represents a graph of a perfectly competitive firm? Be
specific; indicate which curve gives you the information and how you use this information to arrive at your conclusion.

b.

What is the market price?

c.

What is the profit-maximizing output?

d.

What is total revenue at the profit-maximizing output?

e.

What is the total cost at the profit-maximizing output?

f.

What is the profit or loss at the profit-maximizing output?

g.

What is the firm's total fixed cost?

h.

What is the total variable cost?

i.

Identify the firm's short-run supply curve.

j.

Is the industry in a long-run equilibrium?

k.

If it is not in long-run equilibrium, what will happen in this industry to restore long-run
equilibrium?

l.

In long-run equilibrium, what is the firm's profit maximizing quantity?
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Answer verified by a subject expert
anuja709anuja709
wrote...
Posts: 299
6 days ago
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Answer 1

should stop production by shutting down temporarily.



Answer 2

a.

The perfectly competitive firm is a price taker and therefore faces a perfectly elastic demand
curve which is also the MR curve.

b.

Market price = $40

c.

Profit maximizing output = 200

d.

Total revenue = $40 × 200 = $8,000

e.

Total cost = ATC × total output = $24 × 200 = $4,800

f.

Profit = Total revenue - total cost = $8,000 - 4,800 = $3,200

g.

Total fixed cost = AFC × total output = (ATC - AVC) × 150 = $6 × 150 = $900. (Note: fixed cost
has the same value at all output rates)

h.

The total variable cost at the profit maximizing output level = ($4,800 - 900) =$3,900

i.

The firm's short run supply curve is its MC curve above minimum AVC (from point b and
above).

j.

No, the industry is not in a long-run equilibrium because the firm earns an economic profit.

k.

Some firms will enter the industry, causing the industry supply curve to shift rightward. This
causes market price to fall. Entry stops when economic profits are eliminated and all firms break even.

l.

In the long-run equilibrium the firm's profit maximizing quantity = 150, where price will equal
marginal cost.
This verified answer contains over 660 words.
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