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6 February, 09:38

A firm in a purely competitive industry is currently producing 1,200 units per day at a total cost of $600. If the firm produced 1,000 units per day, its total cost would be $400, and if it produced 700 units per day, its total cost would be $375. Instructions: Round your answers to 2 decimal places.

(a) What are the firm's ATC at these three levels of production?

(b) If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?

(c) From what you know about these firms' cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?

(d) If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm's accounting profit per unit be?

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Answers (1)
  1. 6 February, 10:04
    0
    Check the following explanation.

    Explanation:

    A.

    At 1,200 units per day, ATC = 600/1200 = 0.5 $. At 1,000 units per day, ATC = 400/1000 = 0.4 $. At 700 units per day, ATC = 700/375 = 1.86 $.

    B. This industry is not a long run competitive equilibrium, because to be in a long run competitive equilibrium firms must produce at the minimun level ATC. When the firm is producing 1.200, its ATC is grater than the ATC for the production of 1.000. So it is not produce at the minimum level of ATC.

    C. The highest possible price per unit that could exist as the market price in the long run equilibrium is 0.4.

    D. The accounting profit will be 10% of 0.4 = 0.04. As in the long run price will be 0.4. And as the normal rate of profit is 10%.
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