Question

Suppose that the market price is $15 per unit.

Q	TC	FC	VC	ATC	AVC	MC
0	$8	$8	0	8	0	0
1	$12	$8	$4	$12	$4	$4
2	$14	$8	$6	$7	$3	$2
3	$20	$8	$12	$6.67	$4	$6
4	$30	$8	$22	$7.50	$5.50	$10
5	$50	$8	$42	$10	$8.40	$20

a. What quantity will the firm produce?

b. Will this firm be earning a profit? If so, how much?

c. The breakeven price is the point at which the price equals the minimum ATC.  At what price would this firm break even?

d. The textbook indicates that if product price equals the minimum of the AVC or lower, the firm must shut down because at any quantity that the firm produces, the revenue that the firm gets is not even enough to pay the variable costs of production. What is the shutdown price, in the table above?

Answer 1

Answer:-

Ans A) The firm will produce at profit-maximizing level. The profit-maximizing level is where MR (Marginal Revenue) = MC (Marginal Cost)

Here, MR = $15 (price)

MC at 4 units = $10

MC at 5 units = $20

Since there is no output level where MR = MC, the firm should produce at a level where MR > MC so that the variable costs are covered. Hence, the firm should produce 4 units, since beyond that, MR < MC.

Ans B) TC at 4 units = $30

Total Revenue (TR) at 4 units = $15 x 4 units = $60

Since TR > TC, the firm is earning profit.

Profit = TR - TC = 60 - 30 = $30

Ans C) At break-even, Price = minimum ATC

As we can observe from the ATC column of the table mentioned, ATC curve is a U-shaped curve, the lowest point being at price $6.67 (3 units).

Hence, the break-even price is $6.67.

Ans D) Shut down price = Lowest point of AVC curve

As we can observe from the AVC column of the mentioned table, AVC is minimum at 2 units, where AVC = $3

Hence, shut down price = $3

If the price falls to $3 or below, the firm should shut down its production since it is unable to recover the variable cost.