Question

Complete the table and answer the following questions. The price of this perfectly competitive firm is $300.

QTY	FC	VC	TC	AFC	AVC	ATC	MC	MR
0			700
1			650
2			700
3			760
4			840
5			950
6			1090
7			1270
8			1500
9			1790
10			2150

1. Should this firm produce? Explain
2. If so, how many units should it produce?
3. What is the economic profit or economic loss?

Answer 1

QTY	FC	VC	TC	AFC	AVC	ATC	MC	MR / AR
0	700	0	700	-	-	-	-	300
1	700	-50	650	700	-50	700	-50	300
2	700	0	700	350	0	350	50	300
3	700	60	760	233.33	20	255.33	60	300
4	700	140	840	175	35	210	80	300
5	700	250	950	140	50	190	110	300
6	700	390	1090	116.66	65	181.66	140	300
7	700	570	1270	100	81.42	181.42	180	300
8	700	800	1500	87.5	100	187.5	230	300
9	700	1090	1790	77.77	121.11	198.88	290	300
10	700	1450	2150	70	145	215	360	300

Ans. A. = Yes, the firm can produce as long as it is covering Fixed Costs because even if they stop the production , the firm must pay its fixed costs like Rent , Salaries , Insurance , etc. If the firm is not able to cover even these then the firm should shut down its operations.

Ans. B. = The Firm should produce till the point where MR=MC because after this point there will be losses to the firm. So, in above table Firm should Produce till the Output level 9 where MC=290 and MR=300 . After this point firm will start having losses as MC>MR , MC=360 MR=300 , means Costs will be Higher than the Revenue.

Ans. C. = Economic Profit or Loss is basically the difference between the Revenues from Outputs and Costs of the inputs.

Formula for Economic Profit :

Economic profit = Revenues - Explicit costs - Opportunity costs