Question

1. A firm has the following relationship between output (Q) and total cost (TC):

Q	TC
0	$100
1	110
2	130
3	160
4	200
5	250
6	310
7	380
8	460
9	550
10	650

1. Say the firm is a perfect competitor. If the market price for its product is $ 60, at what output level will this firm produce at (as a profit maximizer)?

2. At the output level in (a), are firms in this industry making a profit or loss? Will firms enter or exit the market?

3. Say this firm is a monopoly. If the firm maximizes profit where marginal revenue equals $ 30, at what output level will the firm be producing at (as a profit maximizer)?

Answer 1

We need to construct the table encapsulating AVC, ATC and MC. We know that fixed cost is 100 because TC = 100 when Q = 0. TVC = TC - 100 and AVC = TVC/Q. Also ATC = TC/Q and MC = difference in TC/difference in Q

Output	Fixed cost	Variable cost	Total cost	Average Total cost	Average fixed cost	Average variable cost	Marginal cost
0	100	0	100
1	100	10	110	110.0	100.0	10.0	10.0
2	100	30	130	65.0	50.0	15.0	20.0
3	100	60	160	53.3	33.3	20.0	30.0
4	100	100	200	50.0	25.0	25.0	40.0
5	100	150	250	50.0	20.0	30.0	50.0
6	100	210	310	51.7	16.7	35.0	60.0
7	100	280	380	54.3	14.3	40.0	70.0
8	100	360	460	57.5	12.5	45.0	80.0
9	100	450	550	61.1	11.1	50.0	90.0
10	100	550	650	65.0	10.0	55.0	100.0

a) When P is 60, MC is also 60 when Q is 6 units. At this level AVC is 35. Hence firm maximizes profit by producing 6 units

b) ATC is 51.7. Since P = 60 > ATC = 51.70, there are economic profits and firms will enter in the long run to extract this profit

c) If MR is 30, MC is 30 when Q is 3 units. Hence if the firm maximizes profit where MC = MR = $30, the required output level at which the firm will be producing at is 3 units.