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Homework answers / question archive / A firm in a purely competitive industry is currently producing 1,400 units per day at a total cost of $700
A firm in a purely competitive industry is currently producing 1,400 units per day at a total cost of $700. If the firm produced 1,200 units per day, its total cost would be $450, and if it produced 900 units per day, its total cost would be $425.
a. What are the firm's ATC at these three levels of production?
At 1,400 units per day, ATC = $.
At 1,200 units per day, ATC = $.
At 900 units per day, ATC = $.
b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? (Click to select)
Yes
No.
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? cents per unit.
(a) ATC
(1) At 1,400 units per day
AverageTotalCost=TotalCostQuantity=7001,400=0.5AverageTotalCost=TotalCostQuantity=7001,400=0.5
(2) At 1,200 units per day
AverageTotalCost=TotalCostQuantity=4501,200=0.375AverageTotalCost=TotalCostQuantity=4501,200=0.375
(3) At 900 units per day
AverageTotalCost=TotalCostQuantity=425900=0.472AverageTotalCost=TotalCostQuantity=425900=0.472
(b) The answer to the question is No.
In the long run, the industry is not purely competitive, even if the industry has the same cost structure. A firm that competes and can cover the fixed cost incurred will survive in the long run. A firm which is not able to cover its fixed cost and covers only its variable cost will struggle to survive in the long run. This will have an effect on the total cost of the company and the output as well.
(c) $0.375
As per the question asked, the answer could be that the industry has 1,200 units and the value of the output is $0.375. From all the above three options, this is an industry that has the market price of the firm equal to the minimum average total cost. So, the highest possible price is $0.375 per 1,200 units, which can withstand the competition with the market price in the long-run equilibrium.
(d) 3.75 cents per unit
As we know that, in a purely competitive market, companies can only earn a normal profit. This results in the price to be equal to the minimum average cost. So, the price identified as the highest possible price, that is $0.375, will end up being the market equilibrium price to be used in the long run. And if the normal rate of profit is 10%, then each firm's accounting profit will be $3.75 cents per unit.
