Question

Q1. Peter is producing table lamps in the perfectly competitive market desk lamp market.

a) Suppose the equilibrium price in the desk lamp market is $50. How many table lamps should Peter produce, and how much profit will he make? Please make use of TR, TC, MR and MC curves to illustrate.

b) In next week, the demand for desk lamps drops and the price drops to $30, should Peter shut down? Explain.

Output	Total cost	AFC	AVC	ATC	MC
0	100
1	150
2	175
3	190
4	210
5	240
6	280
7	330
8	390

Answer 1

a)

If P = $50, then the profit maximizing quantity is 7 desk lamps.

Profit-maximizing output for a perfectly competitive firm in the short run is P=MC. Since the competitive firm is a price taker, P= MR. The firm will produce output at which P=MC.

Profit will be (P- ATC ) x Q= (50-47.14) x 7= 2.86 x 7= $20.02,

b)

If P is $30, Peter need not shut down as P > minimum AVC, which is $27,50.

The shut-down point is the minimum SAVC. A firm will supply as long as its minimum SAVC is covered. This will minimize the economic loss as the fixed costs are already incurred.

output	TC $	TFC $	TVC $	AFC $	AVC $	ATC $	MC $
0	100	100	0	-	-	-	-
1	150	100	50	100.00	50.00	150.00	50.00
2	175	100	75	50.00	37.50	87.50	25.00
3	190	100	90	33.33	30.00	63.33	15.00
4	210	100	110	25.00	27.50	52.50	20.00
5	240	100	140	20.00	28.00	48.00	30.00
6	280	100	180	16.67	30.00	46.67	40.00
7	330	100	230	14.29	32.86	47.14	50.00
8	390	100	290	12.50	36.25	48.75	60.00
Total cost = Fixed Cost + Variable costs
Fixed cost is the same for all quantity produced.
Variable costs varys with output.
Average Fixed cost= Total Fixed Cost/Quanity
Average variable cost= Total variable Cost/Quanity
Average total cost= Total Cost/Quanity
Marginal cost is additional cost due to the production of one more unit.
(Change in total cost/Change in output).
Total Revenue= Price x Quantity
Total Profit = Total Revenue - Total Costs