Microeconomics Question 1




PureCompetition in the short run

  1. Yes the product from plant X should be produced

  2. Yes, the product can be produced from plant size Y

  3. Yes the product from plant Z should be produced

Explanations:The product should be produced in all the plants that are, X, Y and Zshould be produced in the short run because the firm is makingprofits under pure competition. However producing from plant Y ispreferable since it has the optimum profit of $2,115. The firm shouldproduce when marginal revenue is equal to marginal cost (Mudida,2010). In the above case, AR is greater than AVC.


  1. If using plant X, the firm should produce 45 units of the product for profit maximization.

  2. When using plant Y, 45 Units should be produced to maximize profit

  3. Plant Z should produce 55 units to maximize the profit.

Inthe above three cases, any further increase in the quantity producedwill lead a decline in the profit margin. This is due to highmarginal cost. In making production decision, the producers should beguided by the criteria that at maximum profit, marginal revenueequals the marginal cost i.e. MR=MC (Mudida, 2010)


Theprice P of the product in three plant (X, Y, and Z) should be set at$64. In pure competition market, the producers are the price takerand the price is always same in all firms in the industry(Wooldridge, 2003).


Atoptimal production, economic profit is at the maximum profit. In thiscase, for quantities produced for each plant above is as follows


Y=$ 2,115


Thisimplies that plant size Y is more productive as it is having highestmaximum profit of $2,115. Producing from plant Y is, therefore, morepreferable though plant X can also be used in case there is an excessdemand. This will help to increase production.


Purecompetition in the long run

Inthe long run the company should produce the product when priceequals marginal revenue, equals to marginal cost, equals to minimumAverage cost. That is P=MR=MC=Min ATC (Wooldridge, 2003).

Inthis case, the product should be produced since a profit is made ineach plant used.


PlantY is the best to be used since it is making the highest maximumprofit of $1,935 as compared to plant X and Z.


Ifusing plant Y, 45 units of the product should be produced. This isbecause profit is optimized at this level of production. Furtherproduction will lead to a decline in the profit made.


Theprice P should be set at $60. In pure competition, exit/entry offirms is merely a reaction to the price. All firm produce ahomogeneous product at the same cost. Thus, price in the long runanalysis of pure competition (Zellner &amp Arnold, 2011).


Atthis production level, the economic profit will be $1,935. At thispoint, 45 units of the product should be produced from plant Y toensure maximum profit. Firms in this kind of market earn economicprofit through the creation of new goods and improved technology toreduce the cost (Zellner &amp Arnold, 2011).



Thequantity should be produced when MR=MC and the price P when P&gtATCis at maximum. All the plants X, Y, and Z, should produce the productsince they are all making a profit.


PlantY is preferable because it has the maximum profit of $ 5,800.


Formaximum profit, only 45 units of the product should be produced byplant size Y. Beyond this production level, the profit will startdeclining.


Theproduct price should be set at $240 so as to maximize the profit. Ina monopoly market, the firms are price makers, and they have powersto set the price of their product. However, the price set is limitedby the quantity produced or demanded (Wooldridge, 2003).


Theeconomic profit at this level of production for plant size Y equals$5,800. For example, if the production increases from 45 to 50 units,the profit lowers from $5,800 to $5,750 and if it is reduced to 40units the production lower to $5100.



Yes,the product should be produced but only under specific conditions.That is only plant X should produce though the production levelshould be kept between 33-55 units. This is because it is only inthis range that the firm can make a profit. Producing in other plantswill lead to a loss. However, if the demand is so high, plant Z mayproduce, but strictly at 45 units since the firm at this level, is atthe break-even point.


PlantX should produce, and the range of quantity produced should be 33-55units.


Theoptimum quantity to be produced is 40units. A rational producer willalways produce at a point where he/she is capable of making maximumabnormal profit (Mudida, 2009).


Theprice should be set at $145 so as to obtain optimal production andmeet the primary goal of the producer that is profit maximization.


Theeconomic profit at this point equals $600. This is the point at whichthe production is optimal, and it is the maximum profit that the firmcan make. In monopolistic competition, the firm should produce at astage where marginal revenue equals the marginal cost. At this point,Price P is greater than the marginal cost but less than average totalcost (Mudida, 2010).


Davis,M. (2014). Economics Basics: Monopoly market. Retrieved March 06,2015, from http://www.csun.edu/~dgw61315/PTlect6y.pdf

MudidaR. (2010).&nbspIntroductionto modern economics, New York:Oxford Press.

Wooldridge,Jeffrey M. (2003),&nbspIntroductoryEconometrics: A Modern Approach,Second Edition, Ohio: South-Western.

Zellner,Arnold (2011),&nbspAnIntroduction to Bayesian Inference in Econometrics,New York: Wiley.