# Understanding Costs in a Purely Competitive Industry ## Cost Analysis Consider the following costs of a typical firm in a purely competitive industry. The firm has no fixed costs, so **average total cost** equals **average variable cost**. ### Cost Table | Quantity | Average Total Cost | Marginal Cost | |----------|--------------------|---------------| | 1 | $24.00 | | | 2 | $16.50 | $9.00 | | 3 | $12.67 | $5.00 | | 4 | $11.25 | $7.00 | | 5 | $12.00 | $15.00 | | 6 | $14.83 | $29.00 | ### Price Expectations 1. **Long-Run Price Expectation**: - Given only the available information, what would you expect the product price to be in the long run? - Options: - $12.00 - $15.00 - $5.00 - $11.25 2. **Short-Run Price Expectation**: - What would you expect the price to be in the short run? - Options: - $9.00 - $15.00 - $5.00 - $7.00 ### Explanation The table provides key cost metrics for different production levels, allowing us to analyze the firm's cost structure. The marginal cost, crucial for decision-making in competitive markets, varies with output level. For instance, the marginal cost increases significantly after the fourth unit, indicating this may influence pricing strategies in different time frames. Explore how these costs affect pricing strategies and market behaviors to gain deeper insights into competitive market dynamics.
# Understanding Costs in a Purely Competitive Industry ## Cost Analysis Consider the following costs of a typical firm in a purely competitive industry. The firm has no fixed costs, so **average total cost** equals **average variable cost**. ### Cost Table | Quantity | Average Total Cost | Marginal Cost | |----------|--------------------|---------------| | 1 | $24.00 | | | 2 | $16.50 | $9.00 | | 3 | $12.67 | $5.00 | | 4 | $11.25 | $7.00 | | 5 | $12.00 | $15.00 | | 6 | $14.83 | $29.00 | ### Price Expectations 1. **Long-Run Price Expectation**: - Given only the available information, what would you expect the product price to be in the long run? - Options: - $12.00 - $15.00 - $5.00 - $11.25 2. **Short-Run Price Expectation**: - What would you expect the price to be in the short run? - Options: - $9.00 - $15.00 - $5.00 - $7.00 ### Explanation The table provides key cost metrics for different production levels, allowing us to analyze the firm's cost structure. The marginal cost, crucial for decision-making in competitive markets, varies with output level. For instance, the marginal cost increases significantly after the fourth unit, indicating this may influence pricing strategies in different time frames. Explore how these costs affect pricing strategies and market behaviors to gain deeper insights into competitive market dynamics.
Chapter1: Making Economics Decisions
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Transcribed Image Text:# Understanding Costs in a Purely Competitive Industry
## Cost Analysis
Consider the following costs of a typical firm in a purely competitive industry. The firm has no fixed costs, so **average total cost** equals **average variable cost**.
### Cost Table
| Quantity | Average Total Cost | Marginal Cost |
|----------|--------------------|---------------|
| 1 | $24.00 | |
| 2 | $16.50 | $9.00 |
| 3 | $12.67 | $5.00 |
| 4 | $11.25 | $7.00 |
| 5 | $12.00 | $15.00 |
| 6 | $14.83 | $29.00 |
### Price Expectations
1. **Long-Run Price Expectation**:
- Given only the available information, what would you expect the product price to be in the long run?
- Options:
- $12.00
- $15.00
- $5.00
- $11.25
2. **Short-Run Price Expectation**:
- What would you expect the price to be in the short run?
- Options:
- $9.00
- $15.00
- $5.00
- $7.00
### Explanation
The table provides key cost metrics for different production levels, allowing us to analyze the firm's cost structure. The marginal cost, crucial for decision-making in competitive markets, varies with output level. For instance, the marginal cost increases significantly after the fourth unit, indicating this may influence pricing strategies in different time frames.
Explore how these costs affect pricing strategies and market behaviors to gain deeper insights into competitive market dynamics.
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