Question

As a production manager of Chifwamba enterprise, you are given the following output, price and total cost data facing a firm.

Output	Total Cost	Price	Fixed Cost (FC)	Variable Cost (VC)	Marginal Cost (MC)	Average Fixed Cost (AFC)	Average Variable Cost (AVC)	Marginal Revenue (MR)	Total Revenue (TR)	Total Economic Profit
0	50	134
1	100	132
2	128	130
3	148	128
4	162	126
5	180	124
6	200	122
7	225	120
8	254	118
9	292	116
10	350	114
11	385	112

1. Complete the above table by calculating FC, VC, MC, AVC, AFC, MR, TR, and Economic Profits [10 Marks].
2. Assuming that the above firm is in a perfectly competitive market structure, is it operating in the short run or long run? Justify your answer by giving two reasons                       [2 Marks]
3. Graph the equilibrium solutions you found in a) for MC, MR, AVC, TVC. [3 Marks]

Answer 1

Output	Total Cost	Price	Fixed Cost (FC)	Variable Cost (VC)	Marginal Cost (MC)	Average Fixed Cost (AFC)	Average Variable Cost (AVC)	Marginal Revenue (MR)	Total Revenue (TR)	Total Economic Profit
0	50	134	50	0					0
1	100	132	50	50	50	50.0	50.0	132	132	32
2	128	130	50	78	28	25.0	39.0	128	260	132
3	148	128	50	98	20	16.7	32.7	124	384	236
4	162	126	50	112	14	12.5	28.0	120	504	342
5	180	124	50	130	18	10.0	26.0	116	620	440
6	200	122	50	150	20	8.3	25.0	112	732	532
7	225	120	50	175	25	7.1	25.0	108	840	615
8	254	118	50	204	29	6.3	25.5	104	944	690
9	292	116	50	242	38	5.6	26.9	100	1044	752
10	350	114	50	300	58	5.0	30.0	96	1140	790
11	385	112	50	335	35	4.5	30.5	92	1232	847

The formulas used:

TC = FC at Q=0, FC is constant throughout. TC=FC+VC or VC = TC-FC, AVC=VC/Q, AFC = FC/Q

Q: output, FC = Fixed Cost, VC = Variable Cost Total Revenue =- Price*Quantity, MR or marginal revenue = Change in total revenue/change in output Economic Profits = total revenue - total cost.

Marginal Cost = Change in total cost/change in output.

The profit max condition for a perfectly competitive firm is P=MC./ In this table, the firm is earning max economic profits at Q=11. The price P= 112 is greater than 35 (marginal cost). The firm is operating in the short-run as the firm is earning positive economic profits with price greater than the marginal cost. There is still scope for expansion which may increase the profits of the firm. In the long-run, the firm earns zero economic profits only. In this case, the firm is earning economic profits. This will attract new firms into the industry. The supply will increase and the price will come down till it is equal to the average total cost and all economic profits are wiped away.