Individual Assignment 2

Part 1

Assume that a firm in a perfectly competitive industry faces a prevailing market price of $50 and has the following total cost schedule:

Quantity	TC	TR	Profit/Loss	MC	MR
0	40	0	-40
				38	5
20	800	100	-700
				0.79	52.37
400	1,100	20000	18900
				-2.65	50
60	2,000	3000	1000
				50	50
80	3,000	4000	1000
				75	50
100	4,500	5000	500
				125	50
120	7,000	6000	-1000
				300	50
130	10,000	6500	-3500
				500	50
140	15,000	7000	-8000

1. Complete the schedule above^^^^

1. How much should this firm produce in order to maximize profit and how much would its profit be ? Explain using the concepts of MR and MC ?

In order to maximise profit , the firm should produce the quantity at which the marginal revenue is equal to the marginal cost. This occurs at the point 60 - 80 units in which should be produced in order to maximise the firms profit. Profit = TR - TC .

The profit between 60 - 80 units is :

1,000 - 1,000 = 0. The firm makes no economic profit. Neither do they make a loss.

1. Is the firm in an long run or short run equilibrium ? Explain

The firm is in a long run equilibrium as it is making zero economic profits. If the firm in this long run equilibrium begin to make a loss they should exit the industry. The market is evidently functioning at its potential given the change in quantity is stabilised at the point 60 units.

1. Given the circumstance in question 3c) if new firms were attached to this market what would be the main consequence for this competitive firm in terms of prices received; quantity produced and profit ?

If new firms were attracted to the market , the main consequence for this competitive firm would be an decrease in prices received. As new firms will enter the market the supply of the product will increase. This firm will need to lower its prices to remain competitive in this perfectly competitive industry. Hence the quantity produced by this firm may decrease as it faces more competition. The profit may also decrease if the price decrease is significant enough.