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Question
What conditions must hold if a profit-maximizing firm produces positive output in a competitive market?
Solution
The following three conditions must hold if a profit maximising firm produces positive level of output (say equilibrium output Q*) in a competitive market:
1) MR must be equal to MC at Q*.
2) MC should be upward sloping or rising at Q*.
3) In short run :- Price must be greater than or equal to AVC. i.e. P ≥ AVC at Q*.
In long run :- Price must be greater than or equal to LAC.
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RELATED QUESTIONS
Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.
Will a profit-maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation.
Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC?
Will a profit-maximising firm in a competitive market produce a positive level of output in the long run if the market price is less than the minimum of AC? Give an explanation.
The following table shows the total revenue and total cost schedules of a competitive firm. Calculate the profit at each output level. Determine also the market price of the good.
|
Quantity Sold |
TR (Rs.) |
TC (Rs.) |
Profit |
|
0 |
0 |
5 |
|
|
1 |
5 |
7 |
|
|
2 |
10 |
10 |
|
|
3 |
15 |
12 |
|
|
4 |
20 |
15 |
|
|
5 |
25 |
23 |
|
|
6 |
30 |
33 |
|
|
7 |
35 |
40 |
The following table shows the total cost schedule of a competitive firm. It is given that the price of the good is Rs 10. Calculate the profit at each output level. Find the profit maximising the level of output.
|
Quantity Sold |
TC (Rs.) |
|
0 |
5 |
|
1 |
15 |
|
2 |
22 |
|
3 |
27 |
|
4 |
31 |
|
5 |
38 |
|
6 |
49 |
|
7 |
63 |
|
8 |
81 |
|
9 |
101 |
|
10 |
123 |
