Act. 28 Answers Fig. 28.1
OUTPUT
TVC
TC
MC
ATC
AVC
0
$0
$12
1
4
16
$4
$16
$4
2
7
19
3
9.50
3.50
3
9
21
2
7
3
4
12
24
3
6
3
5
18
30
6
6
3.60
6
27
39
9
6.50
4.50
7
37
49
10
7
5.29
8
49
61
12
7.63
6.13
9
63
75
14
8.33
7
10
79
91
16
9.10
7.90
Fig. 28.2
Fig. 28.2
• (C) How would you interpret the vertical
distance between the average total cost and
average variable cost curves? It is average
fixed cost (AFC). As AFC decreases
continuously, the ATC and the AVC curves get
closer together.
Fig. 28.2
• (D)Why does average total cost decline at first,
then start rising as output is increased?
When MC < ATC, ATC declines. When MC > ATC,
ATC rises. Why does MC rise? Diminishing
MPP
Fig. 28.2
• (E) The marginal cost curve intersects both
average cost curves (ATC and AVC) at their
minimum points. Why? If the marginal is
below the average, the average is
decreasing. If the marginal is above the
average, the average is increasing.
Therefore, the average crosses the marginal
at the average’s lowest point.
Fig. 28.2
• (F) If fixed costs were $20 instead of $12, how
would the change affect average variable costs
and marginal costs? They would not change.
(But ATC would increase.) Fixed cost, by
definition, does not change when output
changes. Therefore, fixed cost has no
influence on variable cost or marginal cost.
Fig. 28.2
• #2
• (A) Draw and label the average and marginal
revenue curves on your graph. A horizontal
line at $11.00
Fig. 28.2
• (B) In order to maximize profits, Fiasco would
sell 7 units, at a price of $11.00 . Its average
total cost would be $7.00 . Its average revenue
would be $11.00 . It would earn a per unit
profit of $4.00 and total profit of $28.00 ($4 x
7) per day.
Fig. 28.2
• (C) If the firm produced instead at the
quantity that minimized its average total cost,
it could sell 4.5 units, at a price of $11.00 . Its
average total cost would be $6.00 (or less
than $6.00, say, $5.50). If the market price
were $11, its average revenue would be
$11.00 . It would earn a per-unit profit of
$5.50 and total profit of $24.75 ($5.50 x 4.5)
per day.
Fig. 28.2
• (D) If the competitive market price fell to $5 a
unit, Fiasco would sell 4 units. Average total
cost would be $6.00 . It would earn a per-unit
(profit / loss) of $1.00 and a total (profit /
loss) of $4.00 ($1.00 x 4) per day.
Fig. 28.3 Part B
OUTPUT
TC
MC
ATC
1
$9
2
13
$4
6.50
3
18
5
6
4
24
6
6
5
31
7
6.20
6
39
8
6.50
7
48
9
6.86
8
58
10
7.25
9
69
11
7.67
10
81
12
8.10
$9
Fig. 28.3 Part B
• (B) The level of output at which average total
cost is at a minimum is between 3 and 4 units.
• At this output, average total cost is $6.00 .
Figure 28.4
Price and Quantity Supplied
PRICE
QUANTITY SUPPLIED
$6
4
7
5
8
6
9
7
10
8
11
9
12
10
Figure 28.4
Price and Quantity Supplied
• (D) In general, the supply schedule (curve) of a
perfectly competitive firm coincides with its
MC schedule (curve) in the range where MC is
greater than AVC .
Figure 28.5
Market Demand for an Industry
PRICE
QUANTITY DEMANDED
QUANTITY SUPPLIED
$12
2,000
10,000
11
3,000
9,000
10
4,000
8,000
9
5,000
7,000
8
6,000
6,000
7
7,000
5,000
6
8,000
4,000
Figure 28.5
• (A) Fill in the industry supply schedule in Figure
28.5. Then answer the following questions by
filling in the answer blanks, underlining the
correct words in parentheses or writing a
sentence.
• (B) Explain briefly how the short-run supply
schedule (curve) of a competitive industry is
derived. The horizontal sum at each price of all
firms’ supply curves = MC above minimum AVC.
Figure 28.5
• (C) Given the present 1,000 firms in the
industry, the present market price is $8.00 ;
the present equilibrium quantity is 6,000
units. At this price, each firm will be making
( positive economic profit / zero economic
profit / negative economic profit / economic
losses).
Figure 28.5
• (D) Given the equilibrium above, and assuming
that other firms can enter the industry with the
same cost as the present firms, the number of
firms in the industry in the long run will tend to
( increase / decrease/ remain constant) and the
price will tend to (increase / decrease / remain
constant). The output of the industry will tend to (
increase / decrease / remain constant), while
output per firm will (increase / decrease / remain
constant).
Figure 28.5
• (E) If this is a constant-cost industry (i.e., costs
per unit of output are constant as the industry
expands), the long-run equilibrium price for
the industry will be $6.00 ; output per firm
will be 4 units. There will be 2,000 firms in the
industry, each earning 0 economic profits;
industry output will be 8,000 units. The
equilibrium price coincides with the minimum
per-unit cost of production. Emphasize
minimum ATC
Figure 28.5
• (F) Can you see why, under the conditions
described above, that the long-run marketsupply curve for this industry would appear as
a horizontal line on a graph? Explain. Other
firms can enter and eliminate any economic
profit that appears. Thus, in the long run, all
firms will be at minimum ATC.
Figure 28.5
• (G) Using the cost curves in Figure 28.2, at
what price would this long-run horizontal line
be plotted? $6.00 Explain why it would be at
this price. This is the quantity where MC
equals ATC at the minimum level of ATC. The
perfectly competitive firm breaks even in the
long run at minimum ATC: its most technically
efficient point.