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Heading 2 Q3. Using the following exhibit explain why the long run price in this market will end up at $3.20. Average cost Marginal cost Average cost Marginal cost Marginal Cost/Marginal Revenue (9 -NWAMONOD Marginal Cost:Marginal Revenue Marginal revenue Marginal Total cost revenue Total revenue - Total cost TIT 0 10 20 30 40 50 60 70 80 90 100 20 30 40 50 60 70 80 90 100 Quantity (flash drives) Quantity (flash drives) (a) Price Intersects marginal cost above the average cost curve. (b) Price Intersects marginal cost on the average cost curve. At a price of $4, price is at a level where producing at the quantity where P - MC leads to a price that is above average cost. In this At a price of $3.20, the price is now at a level where producing at the firm is earning a profit. Total revenue is the quantity of quantity where P - MC leads to a price that is equal to the average 80 times the price of $4, or $320, shown by the overal shaded cost. Total revenue is now a quantity of 70 times a price of $3.20. To box. Total cost is the quantity of 80 times an average cost of $3.30, tal cost is the same: a quantity of 70 times an average cost of $3.20. or $264, shown by the bottom shaded box. The leftover rectangle Zero profit is being earned in this situation, where total revenue exceeds total cost is the profit earned. Total Fixed Variable Marginal Average Marginal cost Quantity Cost Cost Cost Cost Cost Average cost $62 $62 10 $90 16- $62 $28 $2,80 $9.00 5- 20 Loss $110 $62 $48 $2.00 $5.50 Marginal Cost/Marginal Revenue S 30 $126 $62 $1.60 $4.20 pront)- 1 3- 40 $144 $62 $1.80 $3.60 Marginal 50 $62 2 7 $166 $104 $2.20 $3.32 fromal cost revenue GO $192 $62 $130 $2.60 $3.20 Total revenue 70 $224 $62 $162 $3.20 $3.20 0 10 20 30 40 50 60 70 80 90 100 $264 $62 $202 $4.00 $3.30 Quantity (flash drives) SO $324 $62 $262 $6.00 $3.60 100 (c) Price Intersects marginal cost below the average cost curve. $404 362 $342 $8.00 $4.04 At a price of $2. 20, when the firm produces at a quantity where - MC, the price is below average cost. Here, the firm is suffering losses. Total costs are the large rectangle with a quantity of 50 and a price of $3.32, for total costs of $168. Total revenues are a quantity of 50 and a price of $2 20, of $110, shown by the smaller shaded box The leftover rectangle on top thus shows the losses, that is, the amount that total cost exceeds total revenue. Q4. Using exhibit 10-3 (above), in the long-run at the profit maximizing point, or profit- maximization condition, what can be said for the marginal cost, the marginal revenue and price in this example? In the long run, explain why this is true for all perfectly competitive firms? Q5. What happens in a competitive market when there are positive economic profits? Will this situation last? (Hint: What is the long run adjustment that leads to a return to normal profits or zero economic profits.)
