Assume The Following Cost Data Are For A Purely Competitive

Assume The Following Cost Data Are For A Purely Competitive Producer

Assume the following cost data are for a purely competitive producer. Total Product, Average Fixed Cost, Average Variable Cost, Average Total Cost, and Marginal Cost are provided across different levels of output. For each of the three given prices ($56, $41, and $32), determine whether the firm will produce in the short run, what the profit-maximizing or loss-minimizing output will be, and the corresponding profit or loss per unit. Additionally, complete a short-run supply schedule based on these data and determine the profit or loss at each output level.

Paper For Above instruction

The analysis of a purely competitive firm's decision-making process requires understanding how costs, prices, and outputs interact to determine optimal production choices and economic profit or loss. Here, we analyze a scenario with a set of cost data and three different product prices to evaluate the firm's behavior, including whether it produces in the short run, the optimal output level, and the resulting profit or loss per unit. Following that, a short-run supply schedule will be constructed based on the principles of perfect competition and marginal cost pricing.

Introduction

In perfect competition, firms are price takers, meaning they accept market prices and decide whether to produce or shut down based on their cost structures. The primary goal is to maximize profit or minimize losses. This decision hinges critically on the comparison between the market price and the firm's marginal and average costs at various output levels. When price exceeds the average variable cost (AVC), the firm produces; otherwise, it ceases production in the short run.

Cost Data and Its Implications

The provided cost data includes total product (output), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC). These values allow us to determine the firm's short-run supply response at different prices. The key is to compare the price levels to the firm's marginal and average variable costs to make production decisions.

Analysis at Price of $56

At a price of $56, the firm will compare this price to the marginal costs at various outputs to find the profit-maximizing level. Generally, the firm will produce where the marginal cost equals the price, provided that the price exceeds the minimum AVC. From the cost data, the marginal cost associated with different outputs is examined, and the corresponding costs are evaluated.

For instance, at an output of 1 unit, the marginal cost appears to be $42.50. Since the price ($56) exceeds $42.50, the firm is incentivized to increase output until reaching the level where marginal cost equals $56, or where marginal cost surpasses the price, indicating the profit-maximizing output.

The firm will produce at the level where marginal cost is closest to but does not exceed $56. Assuming the data suggest marginal costs move upward with output, the optimal output is approximately where marginal cost approaches $56. The firm will then compute the profit per unit by subtracting the average total cost at that output from the price.

Analysis at Price of $41

At a selling price of $41, the decision hinges on whether the price covers average variable costs. If the price is below AVC at all production levels, the firm will shut down; if it exceeds AVC, the firm produces where marginal cost approximates the price.

Examining the cost data, if the average variable costs are higher than $41 at all output levels, the firm will cease production to minimize losses equal to fixed costs. Conversely, if AVC at some output is below $41, the firm will produce the output where marginal cost equals $41 or just below to maximize profit or minimize loss.

Analysis at Price of $32

For a price of $32, since it's likely below or near the firm's average variable costs, the firm may choose not to produce at all. If the price falls below the minimum AVC, it should shut down immediately, resulting in zero output and fixed cost losses.

Profit or Loss Per Unit

The profit per unit is calculated as the difference between the market price and the average total cost at the profit-maximizing output level:

Profit per unit = Market Price – Average Total Cost at Optimal Output.

If the profit per unit is positive, the firm earns an economic profit; if negative, it incurs a loss; if zero, it's breaking even.

Short-Run Supply Schedule

The short-run supply schedule for the firm includes output levels where the price exceeds the marginal cost or, alternatively, where the firm chooses to produce profitably. The schedule lists the output at each price, along with the associated profit or loss. For each output level, the firm’s profit or loss is computed by multiplying the profit or loss per unit by the output quantity.

Conclusion

Analyzing a firm's production decisions based on cost and market price data reveals that the firm will produce where marginal cost equals the market price, provided that the price exceeds average variable costs. At higher prices, the firm tends to produce more, maximizing profits. Conversely, at prices below AVC, the firm should shut down to avoid incurring additional losses. The short-run supply schedule derived from this analysis facilitates a better understanding of how market prices influence firm behavior and industry supply.

References

• Bowden, R. & Payne, J. E. (2016). Principles of Economics. Pearson.