Question

Q3: a) The following table shows some costs of a typical firm that operates in a perfectly competitive industry where the market price (P*) is $20 per unit. Complete the following table. Show values to 2 decimal places if they are not whole numbers.

Hint: Start with the first row.

Q (units)	TFC	TVC	TC	AFC	AVC	ATC	MC	TR	AR	MR
0			$60	–	–	–	–		–	–
1		$15
2					$12.50
3						$31
4		$44
5					$11.80
6			$141
7		$117
8							$52

b) What is the firm’s profit maximizing output level and what is the size of the firm’s economic profit at this output level?

c) What does the firm’s shut-down price equal?

d) What does the firm’s break-even price equal?

Answer 1

a.

Q (units)	TFC	TVC	TC	AFC	AVC	ATC	MC	TR	AR	MR	Profit
0.00	60.00		60.00								-60.00
1.00	60.00	15.00	75.00	60.00	15.00	75.00	15.00	20.00	20.00		-55.00
2.00	60.00	25.00	85.00	30.00	12.50	42.50	10.00	40.00	20.00	20.00	-45.00
3.00	60.00	33.00	93.00	20.00	11.00	31.00	8.00	60.00	20.00	20.00	-33.00
4.00	60.00	44.00	104.00	15.00	11.00	26.00	11.00	80.00	20.00	20.00	-24.00
5.00	60.00	59.00	119.00	12.00	11.80	23.80	15.00	100.00	20.00	20.00	-19.00
6.00	60.00	81.00	141.00	10.00	13.50	23.50	22.00	120.00	20.00	20.00	-21.00
7.00	60.00	117.00	177.00	8.57	16.71	25.29	36.00	140.00	20.00	20.00	-37.00
8.00	60.00	169.00	229.00	7.50	21.13	28.63	52.00	160.00	20.00	20.00	-69.00

b. Loss minimizing level of output is 5 units and the economic loss is -$19

c. Shut down price equals minimum average variable cost = $11

d. Break even price, it is the selling price which makes cost equals revenue and is shown as below. Break even price equals $23.5

Q (units)	TFC	TVC	TC	AFC	AVC	ATC	MC	TR	AR	MR	Profit
0.00	60.00		60.00								-60.00
1.00	60.00	15.00	75.00	60.00	15.00	75.00	15.00	23.50	23.50		-51.50
2.00	60.00	25.00	85.00	30.00	12.50	42.50	10.00	47.00	23.50	23.50	-38.00
3.00	60.00	33.00	93.00	20.00	11.00	31.00	8.00	70.50	23.50	23.50	-22.50
4.00	60.00	44.00	104.00	15.00	11.00	26.00	11.00	94.00	23.50	23.50	-10.00
5.00	60.00	59.00	119.00	12.00	11.80	23.80	15.00	117.50	23.50	23.50	-1.50
6.00	60.00	81.00	141.00	10.00	13.50	23.50	22.00	141.00	23.50	23.50	0.00
7.00	60.00	117.00	177.00	8.57	16.71	25.29	36.00	164.50	23.50	23.50	-12.50
8.00	60.00	169.00	229.00	7.50	21.13	28.63	52.00	188.00	23.50	23.50	-41.00