Microeconomics, Module 7: Competition, Short Run

Homework Assignment

(The attached PDF file has better formatting.)

Shutdown Price

We have the following information for a competitive firm:

Quantity    Variable Cost    Fixed Cost
1    9    10
2    14    10
3    18    10
4    21    10
5    25    10
6    33    10
7    42    10
8    52    10


Part A: What is the marginal cost at each quantity supplied? (The variable cost in the table above is the total variable cost. The marginal cost is the difference in total variable cost between N and N-1 units. Note that the marginal cost curve is U-shaped: It is high at Q = 1 and Q = 8, and it is low at Q = 4.)

Part B: What is the competitive firm’s short-run shutdown price? (For a competitive firm, the shutdown price is the minimum average variable cost. Complete the table below, and find the price at the minimum average variable cost. The average variable cost has a minimum because the marginal cost curve is U-shaped.)

Quantity    Variable Cost    Fixed Cost    Average Variable Cost
1    9    10    
2    14    10    
3    18    10    
4    21    10    
5    25    10    
6    33    10    
7    42    10    
8    52    10    


Part C: What is the firm’s total profit at this short-run shutdown price? (At the shutdown price, the total revenue collected just covers the total variable costs of production. The firm’s profit is negative at this price.)

{Note: The first part shows the U-shape of the marginal cost curve; it is not necessary for the homework. The last two parts are sufficient for full credit.}