Cost And Revenue
A firm operating in perfect competition has no influence over market price. It can sell any amount at the market-clearing price. The only one major decision to make then is about what quantity should be produced. When it decides the quantity to produce, then this quantity—along with the prices prevailing in the market for output and inputs—will determine the firm’s total revenue, total costs, and ultimately, level of profits.
In the Costs and Revenue in Perfect Competition Template Download Costs and Revenue in Perfect Competition Template(MS Excel), fill in the missing values in the given table.
Make sure to use the "formula" feature.(The numbers in the table change. So, if you don't use the "formula", your answers will be incorrect because of the changing numbers.) Please refer Excel Formulas and Functions TutorialLinks to an external site. for guidance.
Calculate marginal cost (MC), marginal revenue (MR), average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC).
Graph all the cost curves and the MR curve.
Find the profit-maximizing price and output.
Calculate the profit (or loss).
In your paper, based on the readings for the week and your calculations in the worksheet, answer the following question:
Explain if the firm should remain open or temporarily shut down when the price drops to $10.
Discuss why firms in perfectly and monopolistically competitive markets stay in business despite having zero economic profit in the long run.
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Sample Solution
1. Filling in Missing Values:
- Marginal Cost (MC): Calculate the change in total cost (TC) divided by the change in quantity (Q) for each successive output level.
- Marginal Revenue (MR): In perfect competition, MR equals the market price (P), which is constant for any quantity sold.
- Average Fixed Cost (AFC): Divide total fixed cost (TFC) by quantity (Q).
- Average Variable Cost (AVC): Divide total variable cost (TVC) by quantity (Q).
- Average Total Cost (ATC): Divide total cost (TC) by quantity (Q).
Full Answer Section
2. Graphing Cost Curves and MR:
- Plot the MC, ATC, AVC, and AFC curves on a graph with quantity (Q) on the x-axis and cost on the y-axis.
- Draw the horizontal MR curve at the market price level.
3. Finding Profit-Maximizing Price and Output:
- Identify the output level where MR equals MC. This is the profit-maximizing quantity.
- The profit-maximizing price is the market price (P).
4. Calculating Profit or Loss:
- Profit = Total Revenue (TR) - Total Cost (TC)
- TR = P * Q
5. Determining Shutdown Decision (Price Drop to $10):
- If the price falls below the minimum average variable cost (AVC), the firm should shut down temporarily. This is because it cannot even cover its variable costs, let alone contribute to fixed costs.
- Compare the price of $10 to the minimum AVC from your calculations to decide.
6. Addressing Zero Economic Profit:
- In perfect competition, zero economic profit in the long run means firms earn just enough to cover their opportunity costs (including normal profit).
- Firms stay in business because:
- They earn normal profit, which is the minimum return required to keep entrepreneurs engaged.
- Exiting the market might involve costs (e.g., breaking contracts, selling assets at a loss).
- They might anticipate future economic profits due to changes in market conditions or technological advancements