Question

In: Economics

If possible, calculate total profits given a price of $80, an average total cost of $30,...

If possible, calculate total profits given a price of $80, an average total cost of $30, and an output of 5.

If price is above average total cost, is the firm making a profit or loss and should it operate or shut down?

None of the above.

Profit and it should operate.

Loss and it should shut down to minimize losses.

Loss and it should operate to minimize losses.

Suppose that a firm is making a profit of $50 million operating at 50,000 units of output. At that level of output, marginal revenue is $1,000 and marginal cost is $1,200. What, if anything, should the firm do? Explain.

Increase production to increase profits

Nothing since it is making a profit

Shut down since the firm is losing money

What does the marginal revenue curve of a perfectly competitive firm look like?

Downward sloping and above the demand curve

Downward sloping and below the demand curve

Same curve as demand

Upward sloping

If a business has revenue of $100,000, explicit costs of $30,000, and implicit costs of $20,000, what are the economic profits?

What kind of economic profits will a perfectly competitive firm make in the long run equilibrium?

Positive economic profits

Negative economic profits

Not enough information

Zero economic profits

Decrease production to increase profits

Expert Solution

1. If possible, calculate total profits given a price of $80, an average total cost of $30, and an output of 5.

Profit = Total Revenue – Total Cost

TR = $80*5 = $400

TC = $30*5 = $150

Profit = $400 – $150 = $250

2. If price is above average total cost, is the firm making a profit or loss and should it operate or shut down?

Answer - Profit and it should operate.

As the Price is above the ATC, the firm is definitely enjoying economic profits. Hence, it should operate.

3. Suppose that a firm is making a profit of $50 million operating at 50,000 units of output. At that level of output, marginal revenue is $1,000 and marginal cost is $1,200. What, if anything, should the firm do? Explain.

Answer – At the profit maximizing output the marginal cost must be equal the marginal revenue. In the question, the MR = $1000 and MC = $1200. It means the MC is more than MR.

If at all the marginal revenue is less than the marginal cost, the firm is definitely losing profits with each additional unit produced. Hence, the producer should produce less.

In the given options, the most appropriate option is

Nothing since it is making a profit

However, the firm should produce less to increase the profits.

There will not be any question of shut down as the firm is making profits (for profits AR must be greater than AC)

4. What does the marginal revenue curve of a perfectly competitive firm look like?

Same curve as demand

It will be same as demand curve or average revenue curve. It will be straight horizontal curve.

5. If a business has revenue of $100,000, explicit costs of $30,000, and implicit costs of $20,000, what are the economic profits?

Economic Profit = Total Revenue – (Explicit Cost + Implicit Cost)

Economic Profit = $100,000 – ($30,000 + $20,000)

Economic Profit = $50,000

6. What kind of economic profits will a perfectly competitive firm make in the long run equilibrium?

Answer – Zero economic profit

Long run competitive firm always gets zero economic profit. Its average revenue will be equal to average cost.

Rahul Sunny answered 2 years ago

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