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MC
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McGraw-Hill Education | Frank and Cartwright, Microeconomics and Behaviour 3e
01 –
Chapitre 06
Exercise
® 2010 Pearson Education France
01 –
Chapitre 06
Chapter 12, Ex. 2
• If the short-run marginal and average variable cost curves for a
competitive firm are given by SMC = 2 + 4Q and AVC = 2 + 2Q, how many
units of output will it produce at a market price of 10?
• At what level of fixed cost will this firm earn zero economic profit?
• Answer:
• Setting price P = 10 equal to marginal cost of SMC = 2 + 4Q, solve for
quantity 10 = 2 + 4Q which yields Q = 2.
• Solving = TR – TC = 0 PxQ – (AVCxQ + FC) = 0.
• This yields: 10x2 – 6x2 – FC = 0 FC = 8.
12
® 2010 Pearson Education France
01 –
Chapitre 06
Exercise
® 2010 Pearson Education France
01 –
Chapitre 06
Midterm 2 2020: Perfect Competition
• Consider a firm with the following short run variable cost
function
𝑉𝐶 𝑄 = 𝑄3 − 4𝑄2 + 10𝑄
• and fixed cost FC=15.
• a) Below which price Pmin will this firm stop producing?
® 2010 Pearson Education France
01 –
Chapitre 06
The Shutdown Condition
• Shutdown condition: if price falls below the minimum of
average variable cost, the firm should shut down in the short
run.
15
® 2010 Pearson Education France
01 –
Chapitre 06
Figure 12.3: The Short-Run Supply Curve
of a Perfectly Competitive Firm
McGraw-Hill Education | Frank and Cartwright, Microeconomics and Behaviour 3e
® 2010 Pearson Education France
01 –
Chapitre 06
Midterm 2 2020: Perfect Competition
Answer
The average variable cost equals:
𝑉𝐶(𝑄)
𝐴𝑉𝐶 𝑄 = = 𝑄2 − 4𝑄 + 10
𝑄
The minimum of the average variable cost complies to the following condition:
𝑑𝐴𝑉𝐶(𝑄)
0= = 2𝑄 − 4 𝑄𝑚𝑖𝑛 = 2
𝑑𝑄
The average variable cost at Qmin equals:
𝑃𝑚𝑖𝑛 = 𝐴𝑉𝐶𝑚𝑖𝑛 = 𝐴𝑉𝐶 𝑄𝑚𝑖𝑛 = 4 − 8 + 10 = 6
The firm does not produce if P < 6. It does produce if P > 6.
® 2010 Pearson Education France
01 –
Chapitre 06
Midterm 2 2020: Perfect Competition
b) Calculate the individual supply function P(Q) for this company, for prices at which
the quantity produced is positive (so P > Pmin).
® 2010 Pearson Education France
01 –
Chapitre 06
Lecture 12: Impact of fixed cost
• The fixed cost has no impact on the optimal level of output
• Why?
– Optimal production: Marginal revenue = Marginal cost.
• FC “disappears” from the marginal cost:
𝑇𝐶𝑄 = 𝐹𝐶 + 𝑉𝐶𝑄
𝑑𝑇𝐶𝑄 𝑑𝑉𝐶𝑄
𝑀𝐶𝑄 = =0+
𝑑𝑄 𝑑𝑄
19
® 2010 Pearson Education France
01 –
Chapitre 06
Midterm 2 2020: Perfect Competition
b) Calculate the individual supply function P(Q) for this company, for prices at which
the quantity produced is positive (so P > Pmin).
Answer
At a market price above Pmin = AVCmin = 6, the firm will produce such that:
𝑃 𝑄 = 𝑀𝐶 𝑄 = 3𝑄2 − 8𝑄 + 10
® 2010 Pearson Education France
Market Individual Firm
S = ΣMC
ATC i Π i = €640/wk
MC i
Price (€/unit of output)
Price (€/unit of output)
P * = 20 20 P = MR i = 20
12
AVC i
D
0 Q* Q Qi
0 80
U nits of output/wk
McGraw-Hill Education | Frank and Cartwright, Microeconomics and Behaviour 3e
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Market Individual Firm
S MC
P P
MCi
€10 €10 P = MRi = 10
AVC i
Q Qi
100,000 100
• At 10€:
– No consumers are left who would be willing to pay more for extra goods
– No firm would be willing to produce for less
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