Question

In: Economics

You are operating a firm in a perfectly competitive market. In the short run, you have...

You are operating a firm in a perfectly competitive market. In the short run, you have fixed costs of $30. Your variable costs are given in the following table:

Q

VC

0

0

1

100

2

150

3

180

4

220

5

300

6

390

If the market price is $56, what is the profit-maximizing level of output?

Solutions

Expert Solution

We know,

Total Cost (TC) = Variable Cost (VC) + Fixed Cost (FC)

Profit = Price*Quantity - TC

As given,

Price = $56

FC = $30

So, Using above formula and table as given in question :

Q VC TC = VC + 30 Profit
0 0 30 (56*0) - 30 = -30
1 100 130 (56*1) - 130 = -74
2 150 180 (56*2) - 180 = -68
3 180 210 (56*3) - 210 = -42
4 220 250 (56*4) - 250 = -26
5 300 330 (56*5) - 330 = -50
6 390 420 (56*6) - 420 = -84

So,

From above calculations we can see that maximum profit of -$26 is at Q = 4.

So, Profit maximizing level of output is 4

Rahul Sunny answered 2 years ago
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