A Second Look at Firm Behavior Under Perfect Competition

Martin Kolmar and Magnus Hoffmann
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Martin Kolmar: University of St. Gallen

Chapter 9 in Workbook for Principles of Microeconomics, 2018, pp 105-132 from Springer

Abstract: Abstract Assume a profit-maximizing firm. 1. Assume that the firm supplies a strictly positive and finite quantity. Then, the rule “marginal revenues = marginal costs” holds in the optimum. 2. A firm in perfect competition always supplies according the rule “price = marginal costs” if the resulting revenues at least cover the average variable costs. 3. The firm will never make losses in its optimum because it can avoid these by leaving the market. 4. In the long-run market equilibrium with free market entry and exit, a firm’s producer surplus is always equal to zero. Assume a profit-maximizing firm with a cost function of $$C(y)=y^{2}+49$$ C ( y ) = y 2 + 49 in a market with perfect competition. 1. The average costs of this firm are equal to the marginal costs at the minimum of the average cost curve. 2. The average variable costs are $$AVC(y)=2y+\frac{49}{y}$$ A V C ( y ) = 2 y + 49 y . 3. Assume that the firm only produces with one factor (labor), l. The wages are w = 4. That means that the production function of the firm is $$y=4\cdot l^{\frac{1}{2}}$$ y = 4 ⋅ l 1 2 . 4. In the long-run market equilibrium with perfect competition and with free market entry and exit, the equilibrium price is p = 14.

Date: 2018
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DOI: 10.1007/978-3-319-62662-8_9

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