Question

2. Consider a firm with the following short run costs:

Qty	TVC	MC	AVC
1	10
2	16
3	20
4	25
5	31
6	38
7	46
8	55

1. Calculate the MC and AVC for each level of production (quantity).
2. How much would the firm produce if it could sell its product for $5? For $7?, for $10?
3. Explain your answers.
4. Assuming that its fixed cost is $3, calculate the firm’s profit at each of the production levels determined in part c.

Answer 1

Ans:

Qty	TVC	MC	AVC
1	10	10	10
2	16	6	8
3	20	4	6.67
4	25	5	6.25
5	31	6	6.20
6	38	7	6.33
7	46	8	6.57
8	55	9	6.88

Explanation:

AVC = TVC / Q

MC = Change in TC / Change in Q

Ans:

At price level of $5 , the profit maximizing level of output is 4 units.

At price level of $7 , the profit maximizing level of output is 6 units.

At price level of $10 , the profit maximizing level of output is 8 units.

Explanation:

Under perfect competition , the profit maximization or loss minimization condition is where price equals marginal cost ( P = MC) or price is greater than marginal cost ( P > MC).

Ans:

At price level of $5 , the profit maximizing level of output is 4 units. At this level , there is a loss of $8.

Qty	TVC	MC	AVC	TFC	TC	TR	Profit
1	10	10	10	3	13	5	-8
2	16	6	8	3	19	10	-9
3	20	4	6.67	3	23	15	-8
4	25	5	6.25	3	28	20	-8
5	31	6	6.20	3	34	25	-9
6	38	7	6.33	3	41	30	-11
7	46	8	6.57	3	49	35	-14
8	55	9	6.88	3	58	40	-18

At price level of $7 , the profit maximizing level of output is 6 units. At this level , ptofit is $1.

Qty	TVC	MC	AVC	TFC	TC	TR	Profit
1	10	10	10	3	13	7	-6
2	16	6	8	3	19	14	-5
3	20	4	6.67	3	23	21	-2
4	25	5	6.25	3	28	28	0
5	31	6	6.20	3	34	35	1
6	38	7	6.33	3	41	42	1
7	46	8	6.57	3	49	49	0
8	55	9	6.88	3	58	56	-2

At price level of $10 , the profit maximizing level of output is 8 units. At this level of output , profit is $22.

Qty	TVC	MC	AVC	TFC	TC	TR	Profit
1	10	10	10	3	13	10	-3
2	16	6	8	3	19	20	1
3	20	4	6.67	3	23	30	7
4	25	5	6.25	3	28	40	12
5	31	6	6.20	3	34	50	16
6	38	7	6.33	3	41	60	19
7	46	8	6.57	3	49	70	21
8	55	9	6.88	3	58	80	22

Explanation:

TC = TVC + TFC

TR = Price * Quantity

Profit = TR - TC