Question

A firm in a purely competitive industry is currently producing 1,200 units per day at a total cost of $700. If the firm produced 1,000 units per day, its total cost would be $450, and if it produced 700 units per day, its total cost would be $425. Instructions: Round your answers to 2 decimal places. a. What are the firm's ATC at these three levels of production

Answer 1

The ATC at 1,200 units is $0.58/unit, at 1,000 units is $0.45/unit, and at 700 units is $0.61/unit. A firm not covering its ATC at a given price is making losses, and marginal costs exceeding the price suggest a need to reduce output.

Step-by-step explanation:

To calculate the average total cost (ATC) at different levels of production, we divide the total costs by the number of units produced. Here are the calculations for ATC at the given production levels:

• ATC at 1,200 units = $700 / 1,200 units = $0.58/unit
• ATC at 1,000 units = $450 / 1,000 units = $0.45/unit
• ATC at 700 units = $425 / 700 units = $0.61/unit

Key insights: If the price the firm receives for its product is less than the ATC at any production level, the firm is not making a profit. As demonstrated in the provided example, a firm producing five units at a cost of $26/unit and selling at a price of $25/unit would be incurring a loss of $5 in total, or $1 per unit. Additionally, if the marginal costs, like the $30/unit in the example, exceed the price per unit, the last unit produced is reducing overall profits.