Exercise 5: Costs of perfectly competitive firms (5 points) A profit-maximizing
ID: 1138761 • Letter: E
Question
Exercise 5: Costs of perfectly competitive firms (5 points) A profit-maximizing kale producer in a competitive market is currently producing 7,000 tons of kale. The firm faces a market price of S130/ton, average total cost of S100, and fixed costs of S15,000. 1. What is the firm's profit? 2. What is its average variable cost? 3. What is its marginal cost? 4. Is the efficient scale of the firm more than, less than, or exactly 7,000 tons? 1The lowest point where the plant (or firm) can produce such that its long run average costs are minimizedExplanation / Answer
Quantity produced= 7000 tons
Price=$130/ton
Average total cost = $100
Fixed cost = $15000
1) Profit = Total revenue- Total cost-
Total revenue= PxQ = 130 x7000 = 910000
Total cost = Average total cost x Quantity
=100 x 7000
=$700,000
Profit = 910,000-700,000
Profit = $210,000
B) Total Variable cost= Total cost- Fixed cost
= $700,000- $15,000
= $ 685000
Average variable cost = Total variable cost/ quantity
$685000/7000 = $97.8
C) Marginal cost = Cost at Q=7000 - Cost at Q=6999
= 100*7000-100*6999
=100
D) At price = average total cost
Firms earn zero profit. So the quantity should always be mora than tha quantity at this point.
Since at 7000 units level firm is earning some profit. The efficient level of production is below 7000.
D)