The table below fills out the table presented in the question, but also adds a column for the fixed cost (FC). Because the fixed cost does not change with output, it is the same for all output levels. As noted above, the total cost of production is equal to the fixed cost plus the variable cost. Additionally, all averages are calculated as the total divided by the quantity. The marginal cost, on the other hand, is equal to the additional cost of an additional unit and is calculated as the change in total cost divided by the change in output. The values for the output level of 1 are shown below:

TC=VC+FCTC=55+40TC=95AFC=FCQAFC=401AFC=40AVC=VCQAVC=551AVC=55ATC=TCQATC=951ATC=95MC=ΔTCΔQMC=95−401−0MC=551MC=55AFC=TC=VC+FCTC=55+40TC=95AFC=FCQAFC=401AFC=40AVC=VCQAVC=551AVC=55ATC=TCQATC=951ATC=95MC=ΔTCΔQMC=95−401−0MC=551MC=55AFC=

For parts (a), (b), and (c), the firm will produce as long as the price is greater than or equal to the marginal cost because the firm will profit on that unit. At the given quantity supplied, a firm will operate as long as the price is greater than or equal to the average variable cost. This is because profits (or losses) will not be worse than minus the fixed cost, which is the profit level the firm will incur if they shut down.

(a) At a product price of $50, will this firm produce in the short run? Explain. What will its profit or loss be? The firm WILL produce in the short run and will have a profit of $90. At $50, the firm will produce 7 units. At this ouput level, the average variable cost ($31.43) is less than the price ($50), so the firm will continue to operate. The firm's profit is equal to the total revenue (price times quantity) minus the total cost.

profit=TR−TCprofit=PQ−TCprofit=50∗7−260profit=350−260profit=90profit=TR−TCprofit=PQ−TCprofit=50∗7−260profit=350−260profit=90

(b) At a product price of $28, will this firm produce in the short run? Explain. What will its profit or loss be? The firm WILL produce in the short run and will incur a loss of $38. At $28, the firm will produce 5 units. At this ouput level, the average variable cost ($27.60) is less than the price ($28), so the firm will continue to operate. As shown below, the firm will incur a loss of $38, but the firm will still operate because of loss is less severe than if the firm would shut down and incur a loss of $40.

profit=TR−TCprofit=PQ−TCprofit=28∗5−178profit=140−178profit=−38profit=TR−TCprofit=PQ−TCprofit=28∗5−178profit=140−178profit=−38

(c) At a product price of $22, will this firm produce in the short run? Explain. What will its profit or loss be? The firm will NOT produce in the short run and will incur a loss of $40. At $22, the firm would produce 4 units. At this ouput level, however, the average variable cost ($27.50) is greater than the price ($22), so the firm will shut down. As shown below, if the firm did operate, the loss would be greater than minus the fixed cost, so they would shut down and incur the fixed cost instead.

profit=TR−TCprofit=PQ−TCprofit=22∗4−150profit=88−150profit=−62profit=TR−TCprofit=PQ−TCprofit=22∗4−150profit=88−150profit=−62

(d) Complete the following short-run supply schedule for this firm. See below. As noted above, the firm will produce as long as the price is greater than or equal to the marginal cost while profit is equal to the total revenue minus the total cost. Therefore: