Production cost and Perfect competition
Assume that in a perfectly competitive industry operating with an equilibrium price of $25, a firm operating in the short run has the following characteristics:
Variable cost at $20
Total Cost at $30 Out
put=100 Units
Variable cost at $20
Total Cost at $30 Out
put=100 Units
Graphs
a) Draw a graph for the industry and the firm
I. Label:
- AVC
- ATC
- MC
- MR
II. Labelshutdownpoint
III. Labelshutdownprice
IV. Approximately how much is the total profit or loss? How do you know?
Solution
Solution
A
i
ii
Since the firm is operating in the short run it is better to keep going since every unit produced is covering part of the fixed cost. in other words, average variable cost is less than marginal revenue. The shut down point is when equilibrium price fall below the AVC. At this point, the company shall shutdown in the short run in which the shutdown price is 20.
iii. the Shutdown price equals to the AVC which is $20.
iv.
The firm is running at loss because the ATC is higher than the current price of $25. Total loss is $500 since the total cost is 30*100 and total revenue is 25*100.
Profit (LOSS) = Revenue -Total Cost = 25*100 – 30*100 = ($500) or $500 loss.