Chapter 10, Problem 6E

a)

To determine

To calculate: The marginal cost and an average cost schedule for the firm

Answer to Problem 6E

OUTPUT(UNITS)	TOTAL COST($)	MARGINAL COST	AVERAGE COST
10	110	-	11
15	150	40	10
20	180	30	9
25	225	45	9
30	300	75	10
35	385	85	11
40	480	95	12

Explanation of Solution

Given:

Assume that a firm in a perfectly competitive industry has the following total cost schedule:

OUTPUT(UNITS)	TOTAL COST($)
10	110
15	150
20	180
25	225
30	300
35	385
40	480

Explain:

Marginal cost defines that the extension to the total cost by cause of the increment in one unit of output. Average cost is per unit cost. Total cost is divided by the output to know the average cost.

The following is the marginal and average cost schedule:

OUTPUT(UNITS)	TOTAL COST($)	MARGINAL COST   $T{C}_n-T{C}_{n-1}$	AVERAGE COST   $\left(TC/Q\right)$
10	110	-	$110/10=11$
15	150	$150-110=40\text{ (40 / 5 =8)}$	$\text{150/15=10}$
20	180	$180-150=30\text{ (30 / 5 =6)}$	$\text{180/20=9}$
25	225	$225-180=45\text{ (45 / 5 =9)}$	$\text{225/25=9}$
30	300	$300-225=75\text{ (75 / 5 =15)}$	$\text{300/30=10}$
35	385	$385-300=85\text{ (85 / 5 =17)}$	$\text{385/35=11}$
40	480	$480-385=95\text{ (95 / 5 =19)}$	$\text{480/40=12}$

Above schedule depicts the output, total cost, marginal cost and average cost. Marginal cost and average costs schedule have been derived from the output and total cost schedule.

Economics Concept Introduction

Introduction: Marginal cost defined as the production cost that includes all the costs will be vary within that level of the production. Suppose if the firm need to build the new firm to extend to produce the goods and services, the cost of the building firm is called as the marginal cost.

b)

To determine

To calculate: The total number of units will be produced and sold and find the profits per unit and total profits, if the prevailing market price is $17 per unit

Answer to Problem 6E

The total number of units will be produced and sold is 35

The Profits per unit is $\text{\$6}\left(17-11\right)$

The total profit is $\$210$

Explanation of Solution

Given:

Assume that a firm in a perfectly competitive industry has the following total cost schedule:

OUTPUT(UNITS)	TOTAL COST($)
10	110
15	150
20	180
25	225
30	300
35	385
40	480

Let the prevailing market price is $17 per unit.

Explain:

Purely competitive market is characterized by the large number of buyers and sellers. Price is decided by the demand and supply forces. Price is equal to the marginal cost (P=MC).Thus, price and marginal costs are equal at the 35 units of output. A total of 35 units of output will be produced and sold.

Cost per unit is $11 and price per unit is $17.Thus, Profit per unit is $\text{\$6}\left(17-11\right)$ .The following is the total profit (TP).

  $TP=TR-TC$

  $=17\times 35-35\times 11$

  $=595-385$

  $=210$

Economics Concept Introduction

Introduction: Market price is one kind of current price in that the asset or service will be purchase or sale. In terms of economic theory, marginal cost defined as the point of forces of demand and supply meet.it is the prevailing price on the certain day or a certain time.

c)

To determine

To describe: The industry in long-run equilibrium at the given price.

Answer to Problem 6E

Firm is not in long-run equilibrium and also firm gets only normal in long-run purely competitive market.

Explanation of Solution

Given:

Assume that a firm in a perfectly competitive industry has the following total cost schedule:

OUTPUT(UNITS)	TOTAL COST($)
10	110
15	150
20	180
25	225
30	300
35	385
40	480

Explain:

Purely competitive market is characterized by the large number of buyers and sellers in the market. Price is decided by the demand and supply forces in the market. Firm earns the abnormal profit at this price and more firms would be attracted toward the market. Abnormal profit would be withered away. Now each firm would be earning normal profit.

Economics Concept Introduction

Introduction: When long run equilibrium occur, that time the marginal revenue equals to the marginal costs to be also equal to the average total costs. This type of equilibrium will be appeared in perfectly competitive market.