Question

1. Kiki Box Company produces cardboard boxes that are sold in bundles. The market is perfectly competitive, with boxes currently selling for price of $100 per bundle. Kiki’s total and marginal cost, where Q is measured in number of bundles per year, are:

TC = 2,000,000 + 0.001Q²

MC = 0.002Q

1. Calculate Kiki’s profit maximizing quantity.   
2. Calculate total profits earned by this firm.
3. Identify the fixed cost.

Answer 1

(a)

In order to maximize profit a firm produces that quantity at which P = MC

where P = Price of output = 100 and MC = Marginal Cost = 0.002Q.

Thus P = MC => 100 = 0.002Q

=> Q = 50000

Hence, Kiki’s profit maximizing quantity = 50,000 units

(b)

Profit = TR - TC

where TR = Total revenue = P*Q = 100Q and TC = Total Cost =  2,000,000 + 0.001Q²

As Calculated above profit maximizing quantity = 50,000 units

=> Profit = 100Q - (2,000,000 + 0.001Q²)

=> Profit = 100*50,000 - (2,000,000 + 0.001*50,000²)

=> Profit = 500000

Hence, total profits earned by this firm = $500,000

(c)

Fixed Cost is the cost that firm incurs independent of Output i.e. Fixed Cost is constant whatever be the output i.e. Fixed Cost of producing 0 units = Fixed cost of Producing Q units.

Variable Cost is the cost that firm incurs dependent of Output and is 0 when No output is produced.

Thus When Q = 0, then it will incur only Fixed Cost.

TC when (Q = 0) = 2,000,000 + 0.001Q² = 2,000,000 + 0.001*0 = 2,000,000

Hence Fixed Cost = $2,000,000