Question

A firm sells a product in a perfectly competitive market, at a price of $50. The firm has a fixed cost of $30. Fill in the following table and indicate the level of output that maximizes profit. How would the profit-maximizing choice of output change if the fixed cost increased from $40 to $60? More generally, explain how the level of fixed cost affects the choice of output

Output	Total Revenue	Total Cost	Profit	Marginal Revenue	Marginal Cost
0
1					50
2					20
3					30
4					42
5					54
6					70

Answer 1

Ans.

Output(Q)	MR(Price)	TR(P x Q)	Total Cost	Profit(TR-TC)	MC
0	0		30	-30
1	50	50	80( 30 + 50 )	-30	50
2	50	100	100( 80 + 20 )	0	20
3	50	150	130(100 + 30 )	20	30
4	50	200	172( 130 + 42 )	28	42
5	50	250	226(172 + 54 )	24	54
6	50	300	296(226 + 70 )	4	70

-Total Cost start at 30 because 30 is the Fixed cost and gradually it is added with MC to get the Total Cost.

-Where Marginal Revenue > Marginal Cost , which is till 4th unit, hence profit maximizing output will be at 4 unit.

-Increase in Fixed Cost will reduce the profits, as shown below,

TC	Profits(OLD TR - TC)
60	-60
110( 60 + 50 )	-60
130 (110 + 20)	-30
160 ( 130 + 30)	-10
204 ( 160 + 42 )	-2
258 ( 204 + 54 )	-6
328 ( 258 + 70 )	-26

-We see that still at 4th unit the profit are maximized. (-2) at 4th unit.

-Profit maximizing output does not get affected by the change in Fixed Cost. as shown above.

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