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Wonder Juice Company sells its output in a perfectly competitive market
Wonder Juice Company sells its output in a perfectly competitive market. The firm's total cost function is given in the following table:
| OUTPUT (UNITS) | TOTAL COST ($) |
|---|---|
| 0 | 50 |
| 10 | 120 |
| 20 | 170 |
| 30 | 210 |
| 40 | 260 |
| 50 | 330 |
| 60 | 430 |
The total cost includes a normal return on the labor services and the capital the owner has invested in the firm. The current market price is $7 per unit for juice.
a) Calculate the (i) marginal cost and the (ii) average total cost schedule for the firm.
b) What is the firm's profit maximizing output levels? What is the total profit?
c) Is the industry in long-run equilibrium at this price? Justify your answer.
Expert Solution
Marginal cost is calculated by see up much the the addition of each 10 units contributes to total cost. Average total cost is the total cost divided by the number of units. In a perfectly competitive market, production occurs when marginal cost equals price.
| Output | Total Cost | Marginal Cost | ATC |
|---|---|---|---|
| 0 | 50 | - | - |
| 10 | 120 | 7 | 12 |
| 20 | 170 | 5 | 8.5 |
| 30 | 210 | 4 | 7 |
| 40 | 260 | 5 | 6.5 |
| 50 | 330 | 7 | 6.6 |
| 60 | 430 | 10 | 7.17 |
This occurs at both Q =10 and Q = 20. At Q = 10, average cost is 12 and at Q = 20 average cost is cheaper at 6.6. This is near the minimum of the average total cost curve and the firm will produce 50 units. Total profit is 7 * 50 - 330 = 20. Since the firm is earning a positive profit the industry is not in long-run equilibrium.
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