A firm in a competitive market has the following cost structure: Output Total Cost
0 $5
1 $10
2 $12
3 $15
4 $15
5 $24
6 $40

If the market price is $16, this firm will

a. produce 4 units of output in the short run and exit in the long run.
b. produce 5 units of output in the short run and exit in the long run.
c. produce 5 units of output in the short run and face competition from new market entrants in the long run.
d. shut down in the short run and exit in the long run.

Produce 6 units of output in the short run and face competition from new market entrants in the long run.

Explanation:

A firm is operating in a competitive market condition:

Fixed cost = $5 at the output level of 0 unit.

When market price = $16,

Marginal cost of producing 6th unit:

= Total cost of producing 6th unit - Total cost of producing 5th unit

= $40 - $24

= $16

Total revenue at 6 units:

= No. of units × market price

= 6 × $16

= $96

Total cost of producing 6th unit = $40

Total revenue is greater than the total cost at the production level of 6th unit.

This would implies that there is a positive economic profit and this will induce the new firms to enter into the market in the long run.

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