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Question
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.
Solution
It is not possible for any perfect competitive firm to produce a positive level of output in a range where MC is falling. This is because, according to one of the conditions of profit-maximisation, MC curve should be upward sloping or the slope of MC curve should be positive at the equilibrium level of output.
Let us take an example:-
At point Z price is equal to MC, but MC is falling and is negatively sloped. For any level of output more than Oq0, the firm is facing price > MC, which implies that the profit can be maximised by increasing the output level further.
Hence, the point ‘E’ is the equilibrium point, where a profit maximising firm would operate and produce Oq1 units of output and its profit will be maximised.
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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 |
