Question

suppose a perfectly competitive firm faces the following situation: p = $9; output = 4,000; atc = $8; avc = $6; and mc = $9. is this firm's industry productive efficient?

Answer 1

No, the firm's industry is not productively efficient.

Step-by-step explanation:

The firm's industry is not productively efficient because the average total cost (ATC) is greater than the price (P) at the given output level.

In a perfectly competitive market, productive efficiency occurs when the price equals the minimum average total cost (P = ATC). In this case, the price is $9, while the ATC is $8, indicating that the industry is not operating at the minimum possible cost.

The marginal cost (MC) exceeding the price also contributes to the inefficiency. In a perfectly competitive market, profit maximization occurs where MC equals price. Here, MC is $9, surpassing the price of $9, suggesting the firm is not optimizing output for maximum profit.

This misalignment between price and average total cost, along with the MC exceeding price, indicates that resources are not being utilized efficiently in the industry.

In summary, the firm's industry is not productively efficient because the price is below the average total cost, and the marginal cost exceeds the price, highlighting a lack of optimization in resource allocation and production.

Answer 2

The perfectly competitive firm in question is productively efficient in the short run because it produces where P = MC. However, since P > ATC, it is making economic profits, which suggests that the industry may not be in long-run productive efficiency until market adjustments lead to P = ATC.

Step-by-step explanation:

When analyzing whether a perfectly competitive firm's industry is productively efficient, we need to consider the firm's pricing in relation to its costs. Productive efficiency occurs when a firm is producing at the minimum point on its average total cost curve. In a perfectly competitive market, firms achieve productive efficiency because they produce where P = MC, which coincides with the minimum point on the ATC curve in long-run equilibrium.

In this scenario, the firm faces a market price (P) of $9, has an output of 4,000 units, an average total cost (ATC) of $8, an average variable cost (AVC) of $6, and a marginal cost (MC) of $9. Because P = MC, the firm is producing at the output level where marginal revenue is equal to marginal cost, which is the condition for productive efficiency in the short run.

However, for long-run productive efficiency, we look for P = ATC, which represents zero economic profit and indicates no incentive for new firms to enter or existing firms to exit the market. Since P > ATC in this case, the firm is making economic profits, which could lead to other firms entering the market in the long run, thus driving the price down until P = ATC. So, while this firm is productively efficient in the short run, the industry may not be in long-run productive efficiency until new firms enter, and the price adjusts to meet the minimum ATC.