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? Give an explanation.
It is not possible for a firm to produce for a firm to produce positive level of output in the short run if the price is less than the minimum of AVC. This is because as soon as the market price falls below the minimum of SAVC which implies that the firm is not able to cover its fixed as well as variable costs and thus it will stop production.
Let us understand this concept by taking an example.
At the point K price charged by the firm is on and output sold is 0q1 and the firm generates TR.
TR = P × Q
= OP × Oq1
= area (rectangle Oq1 LP)
And incurs the variable cost of TVC
TVC = SAVC × Quantity of output
= ON × Oq1
= area (rectangle Oq1KN)
Profit earned by the firm = TR – TC =TR – (TVC + TFC)
= TR – TVC – TFC
If the firm is not producing anything then at zero level of output the firms TR and VC will by zero.
However the firm has to bear TFC. Thus at zero level of output the profit earned by the firm is
Profit = π1 = TR – TVC – TFC
π1= TFC
Now if it produces Oq1 level of output then the profit earned will be
π2 = TR – TVC – TFC
= area (rectangle Oq1LP) – area (rectangle Oq1KN) – TFC
Or π2 = area (rectangle PLKN) – TFC
This implies that π1 is greater than π2. The firm incurs more loss if it produces Oq1 level of output than the loss associated with zero level of output. Thus the firm will stop production whenever P SAVC and therefore at profit maximising level of output the price must be greater than or equal to SAVC in the short run.
The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
How does the imposition of a unit tax affect the supply curve of a firm?
What is the supply curve of a firm in the long run?
What is the relation between market price and average revenue of a price-taking firm?
What is the relation between market price and marginal revenue of a price-taking firm?
How does an increase in the number of firms in a market affect the market supply curve?
Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is Rs 10.
Quantity Sold | TR | MR | AR |
---|---|---|---|
0 1 2 3 4 5 6 |
How does an increase in the price of an input affect the supply curve of a firm?
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.
Explain the concept of a production function
What would be the shape of the demand curve so that the total revenue curve is?
(a) A positively sloped straight line passing through the origin?
(b) A horizontal line?
Explain market equilibrium.
Discuss the central problems of an economy.
What do you mean by the budget set of a consumer?
What is the total product of input?
From the schedule provided below calculate the total revenue, demand curve and the price elasticity of demand:
Quantity |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Marginal Revenue |
10 |
6 |
2 |
2 |
2 |
0 |
0 |
0 |
- |
When do we say that there is an excess demand for a commodity in the market?
What do you mean by the production possibilities of an economy?
What is budget line?
The following table gives the marginal product schedule of labour. It is also given that the total product of labour is zero at zero level of employment. Calculate the total and average product schedules of labour.
Explain why the budget line is downward sloping.
Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose the price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.
When does a production function satisfy constant returns to scale?
What are the total fixed cost, total variable cost and total cost of a firm? How are they related?
Suppose a consumer’s preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?
Explain the concept of a production function
Explain the concepts of the short run and the long run.
Suppose the demand and supply curves of salt are given by:
(a) Find the equilibrium price and quantity.
(b) Now, suppose that the price of an input that used to produce salt has increased so, that the new supply curve is qs = 400 + 3p
How does the equilibrium price and quantity change? Does the change conform to your expectation?
(a) Suppose the government has imposed at ax of Rs 3 per unit of sale on salt. How does it affect the equilibrium rice quantity?
Distinguish between a centrally planned economy and a market economy.