Consider A Firm With The Following Production Schedule

Consider A Firm With The Following Production Schedule And A Fixed

Analyze a firm's production schedule with a fixed short-run cost of 19, assuming all firms are identical and produce only whole quantities (Q=3.5 not possible). Calculate the long-run competitive equilibrium price, firm quantity, and total market quantity with 100 firms. Then, incorporate a new market demand with specified points to determine the short-run and long-run equilibrium prices, firm output, market size, and firm profits. Finally, illustrate the market and firm dynamics graphically under the new equilibrium conditions.

Next, examine a perfectly competitive firm's production schedule to determine marginal revenue product and labor hiring decisions based on output prices and wages. Discuss how changes in output price and capital costs influence these variables and interpret the underlying effects on factor substitution vs. output effects. Conclude with an evaluation of investment choices under different interest rates and analyze the viability of project B based solely on the provided cash flows and interest rate assumptions.

Paper For Above instruction

Introduction

Understanding firm behavior in both short-run and long-run contexts is fundamental in microeconomic analysis. This paper explores various aspects of competitive firm decision-making, covering equilibrium analysis, production responses to market demand changes, factor employment decisions, and investment choices. The analysis also delves into the effects of market price fluctuations, technological cost changes, and financial considerations on firm strategies, providing comprehensive insights into competitive market functioning.

Part 1: Long-Run and Short-Run Equilibrium Analysis

Starting with an isolated firm characterized by a fixed cost of 19 and the inability to produce fractional quantities, the initial goal is to identify the long-run competitive equilibrium price, firm output, and total market quantity assuming 100 identical firms operate in the market. The key assumption here is that the fixed cost arises from utilizing the unique quantity of a fixed input that minimizes the Long-Run Average Cost (LRAC). Since all firms are identical and market conditions are perfectly competitive, the equilibrium price in the long run equates to the minimum LRAC, which in turn determines the firm’s optimal output and market size.

Given the fixed cost and production schedule, the total cost for each firm at its optimal quantity can be computed, leading to the determination of the competitive equilibrium. The equilibrium price in the long run (LR price) thus corresponds to the minimum long-run average cost, ensuring zero economic profit for firms—an essential condition in perfect competition. The market quantity at this equilibrium is obtained by multiplying the per-firm quantity by the total number of firms (100).

Part 2: Impact of Demand Changes on Market Equilibrium

Introducing a new market demand curve with specified points causes shifts in both short-run and long-run equilibria. The short-run competitive equilibrium price (SRCE) must be recalculated based on the new demand, taking into account firms' fixed costs and current output levels. Firms will examine their profits at this price to determine whether to enter or exit the market, influencing the number of firms settled in the long run (LRCE). This process involves comparing the firm's average total cost (ATC) against the market price, and analyzing whether positive profits attract new firms or losses lead to exits. The new equilibrium thus involves adjusting the number of firms until profits are driven to zero, and the market stabilizes at the new price and quantity levels.

Graphical representation of these dynamics involves plotting the average cost curves, market demand, and marginal revenue curves for firms, illustrating the shifts in equilibrium points and the resulting changes in output and firm numbers. Such diagrams clarify the transitional process from short-run disruptions to long-term stability.

Part 3: Production Decisions and Factor Response

In the second scenario, a firm's production schedule, with output levels based on labor inputs, reveals how firms respond to changes in output prices and input costs. By calculating the Marginal Revenue Product (MRP)—the additional revenue generated by employing an extra unit of labor—the firm determines its optimal labor hiring level when wages are known. When the output price rises to $50, the firm’s hiring decision adjusts based on the comparison between MRP and the market wage ($75), identifying whether labor is hired or scaled back.

If the output price decreases to $30, the MRP diminishes proportionally, potentially leading to reduced labor employment. The shift in labor demand also reflects the larger economic principle that lower output prices can shrink firm profitability and employment levels, which may result in downward pressure on wages—though this depends on wage-setting mechanisms beyond the firm’s immediate decisions. The impact of rising capital costs demonstrates the substitution effect: if capital becomes more expensive, firms substitute labor with capital, provided marginal productivity conditions justify such a shift. The output effect—changes in production volume due to capital cost variations—further influences employment decisions, revealing the dominant force through comparative analysis.

Part 4: Investment Decision Analysis

The decision to undertake Investments A and B hinges on their respective cash flows, costs, and the prevailing interest rate. Calculating the net present value (NPV) of each option at interest rates of 10% and 5% involves discounting future cash flows back to the present. The investment with the higher NPV is optimal under the given rate.

At a 10% interest rate, Investment A and B can be evaluated by discounting their future returns, determining their NPVs, and selecting the more profitable option accordingly. Similarly, at 5%, these NPVs are recalculated, revealing how changes in the discount rate influence investment decisions. The claim that the rate of return for project B is 9% is examined by comparing the project's internal rate of return (IRR) calculations with the given cash flows, determining whether the IRR surpasses or falls below this threshold. Setting an exact IRR equation involves equating the net cash flows discounted at variable rates to zero, providing a precise measure of the project's profitability.

Conclusion

Overall, the analysis demonstrates the complex interplay between production costs, market demand, input prices, and investment decisions within competitive markets. Firms continually adjust their output, employment, and capital usage to maximize profits under changing economic conditions. These dynamics underscore the importance of understanding cost structures, demand elasticities, and financial evaluations in strategic decision-making, ultimately contributing to market efficiency and optimal resource allocation.

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