Question

Firms in the market for soccer balls are selling in a purely competitive market. A firm in the soccer ball market has an output of 5,000 balls, which it sells for $10 each. At the output level of 5,000 the average variable cost is $6.00, the average total cost is $7.50, and the marginal cost is $10.00. What would you expect the firm to do in the short run

Answer 1

In a purely competitive market, a firm maximizes profits by producing output where marginal cost equals marginal revenue.

Step-by-step explanation:

In a purely competitive market, a firm maximizes its profits by producing output where marginal cost equals marginal revenue. The given information states that at an output level of 5,000, the marginal cost is $10.00. Therefore, the firm would expect their marginal revenue to also equal $10.00 at this output level in order to maximize profits. If the firm's marginal revenue is less than $10.00, it would not maximize profits and may consider reducing production.

Answer 2

The firm would continue production in the short run

Step-by-step explanation:

A perfect competition is characterised by many buyers and sellers of homogenous goods and services. Market price is set by the forces of demand and supply. There are no barriers to entry or exit of firms. Firms earn zero economic profit in the long run.

In the short run, if price is less than average variable cost, the firm should shut down. But in this question, price ($10) is greater than average variable cost ($6), the firm should continue production in the short run.

The firm is earning an economic profit because price is greater than average total cost. So, in the long run Firms would enter in the industry and drive the economic profit to zero.

I hope my answer helps you