A firm in a purely competitive industry is currently producing 1,000 unit per day at a total cost of $450. If the firm produce 800 units per days, its total cost would be $300, and if it produce 500 units per day, its total cost would be $275.

a) What are the firm's ATC per unit at these three levels of production? If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?

b) From what you know about these firms? cost structures, what is the highest possible price per unit that could exist as the market prices in long-run equilibrium? If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm's accounting profit per unit be?

Explanation:

1)Average Total Cost =Total cost / Quantity

i. 450/ 1000 units = $0.45 per unit

ii. 300/800 units = $0.375 per unit

iii. 275/500 units = $0.55 per unit

Based on the ATC, the firm is not in long-run equilibrium, because the Average Total Cost at the current output of 1000 units ($0.45) is higher than the Average Total Cost for producing 800 units ($0.375).

2)The highest possible price per unit that could exist as the market prices in long-run equilibrium is $0.375 as it is the average total cost with lowest value.

If the normal rate of profit is 10%, each firm's accounting profit per unit will be

i. 0.45 * 10% = 4.5cents per unit.

ii. 0.375 * 10% = 3.75 cent per units

iii. 0.55 *10% = 5.5 cent per unit.

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