Question

(TCO C) John operates a small business out of his home and has very little in terms of fixed costs. Answer the next questions (Parts A and B) on the basis of the following cost data for John’s firm operating in pure competition. (20 points)

Output	TFC	TVC
0	$30.00	0.00
1	$30.00	70.00
2	$30.00	120.00
3	$30.00	150.00
4	$30.00	200.00
5	$30.00	270.00
6	$30.00	360.00

(Part A) Refer to the above data. If the product price is $70, at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations. (10 points)

Answer 1

The table is below and the columns for total cost, marginal cost and average cost is added. The marginal cost however, doesn't necessarily require the total cost, as since fixed cost is same, marginal cost can be found based on the variable costs. But average cost calculation require total cost.

Output	TFC ($)	TVC ($)	TC($)	MC($)	AC($)
0	30	0	30	-	-
1	30	70	100	70	100
2	30	120	150	50	75
3	30	150	180	30	60
4	30	200	230	50	57.5
5	30	270	300	70	60
6	30	360	390	90	65

If at the optimal output, product price is $70, then that output would be 5 units. The reason being that at 1 unit also, the MC equals the price $70, but marginal cost can be decreased by increasing units. But after 5 units, when MC is again $70, there is no reason to increase production as it would increase the marginal cost.

At 5 units, average cost is $60. Hence, there is an economic profit as price is more than AC. The profit per unit would be $70-$60, ie $10. Hence, profit of 5 units would be $10*5, ie $50.