11. A purely competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all successive units. Does price exceed average variable cost for the first 100 units?

a. Yes

b. No

Question

11. A purely competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all successive units. Does price exceed average variable cost for the first 100 units?

a. Yes

b. No

BlackTom AI · Accepted Answer

Question restatement: A purely competitive firm observes a market price of $20 for its product. It has fixed costs of $100 and a variable cost structure where the first 50 units cost $10 each, and every unit beyond 50 costs $25. The question asks whether price exceeds average variable cost (AVC) for the first 100 units. Options: a) Yes, b) No.

Option a: Yes. To check this, compute the total variable cost for the first 100 units. For the first 50 units at $10 each, variable cost = 50 × 10 = 500. For units 51–100 (another 50 units) at $25 each, variable cost = 50 × 25 = 1250. Total variable cost for 100 units = 500 + 1250 = 1750. The average variable cost for 100 units is 1750 / 100 = 17.50. Since the market price is $20, which is greater than $17.50, price indeed exceeds AVC for the first 100 units.

Option b: No. This would be incorrect because it claims that price does not exceed AVC. The calculation above shows AVC for 100 units is $17.50, and the given price of $20 is higher than that, meaning price does exceed AVC. The error here would be miscomputing AVC or misapplying the relationship between price and AVC in a competitive setting.

ECNM1116.32925.202530 Review Questions Chapter 10 Pure competition in the Short Run

11. A purely competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all successive units. Does price exceed average variable cost for the first 100 units? a. Yes b. No

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