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Assume that a firm in a perfectly competitive market can sell its product for $35 (i
Assume that a firm in a perfectly competitive market can sell its product for $35 (i.e. price per unit of output). Furthermore, it faces the following costs as shown in Table 2:
Table 2
Output (Q) Total Cost 0 25 1 50 2 100 3 120 4 155 5 190 6 250 7 390
a) Calculate Total revenue (TR), Marginal Cost (MC), Fixed Cost (FC), Variable cost (VC) and Average Cost (AC). b) What is the profit maximizing output level? Is this firm is making a profit or loss at profit maximizing output level? Explain. c) Do you think the firm will continue its production in the short run? What will be the long-run price in this market?
Expert Solution
| Output | Total Cost (TC) | Marginal Cost (MC) | Fixed Cost (FC) | Variable Cost (VC) | Average Cost (AC) | Total Revenue (TR = Price*Output) | Profit (TR-TC) |
| 0 | 25 | - | 25 | - | - | - | -25 |
| 1 | 50 | 25 | 25 | 25 | 50 | 35 | -15 |
| 2 | 100 | 50 | 25 | 75 | 50 | 70 | -30 |
| 3 | 120 | 20 | 25 | 95 | 40 | 105 | -15 |
| 4 | 155 | 35 | 25 | 130 | 38.75 | 140 | -15 |
| 5 | 190 | 35 | 25 | 165 | 38 | 175 | -15 |
| 6 | 250 | 60 | 25 | 225 | 41.66 | 210 | -40 |
| 7 | 390 | 140 | 25 | 365 | 55.71 | 245 | -145 |
(b) The profit maximizing level of output will be at a point where
Price = MC
As it can be seen in the table that at output level of 5 unit, price and MC are both $35.
Hence profit maximizing level of output will be 5 units.
Firm is making loss at profit-maximizing level of output which is 5 units. The firm is making economic loss of $15 because TR is less than the TC.
(c) Yes, firm will continue to produce in short run at the profit-maximizing output level of 5 units of outputs because firm is earning more the the variable cost at output level of 5 units.
Firm will shut -down in the long-run because by running the firm at profit-maximizing level of output, firm is not able to cover its total cost in long-run. In the long-run the price will be equal to ATC or Average Total Cost of $38.
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