Question

Cost of Competitive Firm

In Vienna, there is a competitive market for the production of upright pianos. David’s piano production firm can make at most six pianos per week.

Quantity	Fixed Cost ($)	Variable Cost ($)	Total Cost ($)	Marginal Cost ($)
0			2000	---
1				5000
2	2000	11000
3		18000
4				8000
5			37000
6		45000

Complete the four cost columns in the table above.

If the market price of pianos is $8000 this week, how many pianos should David’s firm produce to maximise profit?

What would David’s profit be this week? $

8 points   

Answer 1

Complete the four cost columns in the table above.

Q	FC	VC	TC	MC
0	2000	0	2000
1	2000	5000	7000	5000
2	2000	11000	13000	6000
3	2000	18000	20000	7000
4	2000	26000	28000	8000
5	2000	35000	37000	9000
6	2000	45000	47000	10000

FC does not changes with output so at every level of output Fixed cost will be equal.

VC=TC-FC

TC=FC+VC

TC= TC of previous unit+MC of current unit.

MC=change in TC/ change in Q

If the market price of pianos is $8000 this week, how many pianos should David’s firm produce to maximise profit?

Ans: 4 units

Explanation:

firm maximizes its profit where MR=MC. in perfect competition price=MR. here firm is price taker because it charge market price and thus it is in perfect competition.

at 4 quantity,price=MC. so firm will produce 4 pianos to maximize profit.

What would David’s profit be this week?

$ 4000

explanation:

profit=TR-TC

=32000-28000

=$4000

TR=Price*Q

=8000*4

=32000.