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The following data represents a cost function of a perfect
competitive firm:
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TP or Q |
AFC |
AVC |
ATC |
MC |
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0 |
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1 |
60 |
45 |
105 |
45 |
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2 |
30 |
42.5 |
72.5 |
40 |
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3 |
20 |
40 |
60 |
35 |
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4 |
15 |
37.5 |
52.5 |
30 |
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5 |
12 |
37 |
49 |
35 |
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6 |
10 |
37.5 |
47.5 |
40 |
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7 |
8.57 |
38.57 |
47.14 |
45 |
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8 |
7.5 |
40.63 |
48.13 |
55 |
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9 |
6.67 |
43.33 |
50 |
65 |
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10 |
6 |
46.5 |
52.5 |
75 |
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If the market price, P < 37; this firm's output Q = 0; firm's economic
profit, EP = -60 |
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If the market price, P > 37, this firm's output Q > 0; firms' economic
profit , EP= TR - TC. |
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For example, when P = 65, Q = 9, EP = $65 x 9 - 50 X 9 = 135 |
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By given the market demand at various price level, a market equilibrium
price could be found.
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PRICE |
Qs (1 firm's output) |
PROFIT |
Qs(1500 firms in the market) / market supply |
Qd / market demand |
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26 |
0 |
-60 |
0 |
17000 |
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32 |
0 |
-60 |
0 |
15000 |
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38 |
5 |
-55 |
7500 |
13500 |
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41 |
6 |
-39 |
9000 |
12000 |
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46 |
7 |
-8 |
10500 |
10500 |
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56 |
8 |
63 |
12000 |
9500 |
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66 |
9 |
144 |
13500 |
8000 |
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(assuming identical cost
function for all firms) |
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One firm's output level (column 2 in the above table) is obtained by
comparing P and MC. Since all firms are having the same cost function, the
market output level is the sum of individual firms' output (column 4 in the
above table).
By comparing the market supply and market demand, we can find the market
equilibrium at:
P= 46 and Q = 10500
At this level, each firm is losing 8 dollars, indicating a contraction in
this industry. Some firms may leave in the long run, causing the market
supply to decrease and equilibrium price will increase to the break-even
level.
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