Question

A firm is currently producing 80 units of output. At this level of output produced:

its average total cost is 100 (ATC = 100

) The market price per unit of output is 120

MR = 40 MC = 20

i. Is this firm making profits or losses? How much?

ii. Are they maximum profits? Why?

iii. If your answer to part ii was no, what does this firm have to do with maximize its profits?

A firm's total cost and marginal cost functions are

TC = 15Q^2+3Q - 25

MC = 30Q+3

Assuming that the market price is 183 and that the marginal revenue (MR) is also 183 ( it is constant at all output levels); how much output will this firm sell (produce) to maximize profits? What will be maximum profits for this firm?

Answer 1

The profit maximization output is determined by the intersection of marginal revenue and marginal cost curves, MR=MC.

Profits = (P-ATC)*Q = (120-100)*80 = 1600, (the firm is earning economic profits of 1600), the profits are however NOT maximum and can be increased with an increase in production.

MR=40 and MC=20 would mean that firm is not maximizing profits. It should produce more in order to maximize profits.

Second Question
TC = 15Q^2+3Q - 25, ATC = TC/Q = 15Q + 3 - 25/Q

MC = 30Q+3

Equilibrium or profit max output is determined at P=MC

183=30Q+3

30Q = 180

Q = 6 units

ATC at Q = 6, = 15*6 + 3 - 25/6 = 88.83

Profits = (P-ATC)*Q = (183-88.83)*6 = 565.02 (max profits)