Question

2. The table below illustrates the quantity of output (in units) and total cost (TC, in MYR) for a perfectly competitive firm that can sell its output at MYR 9 per unit.

Quantity	TC	TVC	ATC	AVC	MC	TR	MR	Profit /Loss
0	3	0	-	-	-	0	-	-3
1	6
2	12
3	21
4	33
5	49

a. Calculate the total variable cost (TVC), average total cost (ATC), average variable cost (AVC), marginal cost (MC), total revenue (TR), marginal revenue (MR) and profit or loss at every levels of quantity. Fill in the blank entries. Show your calculations.

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b. Determine the profit maximizing level of output and the amount of economic profit the firm is making at current price of MYR 9.

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c. Determine whether the firm will produce or not in the short run, given the following price levels. Calculate the amount of profit or loss at each level.

1. At a market product price of MYR 3.

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2. At a market product price of MYR 16.

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[Total: 15 marks]

Answer 1

2.a) Ans:

Quantity	TC	TVC	ATC	AVC	MC	TR	MR	Profit /loss
0	3	0	--	--	--	0	--	-3
1	6	3	6	3	3	9	9	3
2	12	9	6	4.5	6	18	9	6
3	21	18	7	6	9	27	9	6
4	33	30	8.25	7.5	12	36	9	3
5	49	46	9.80	9.2	16	45	9	-4

Explanation:

TC = TFC + TVC

TVC = TC - TFC

Fixed cost are available even at zero level of output and remain constant throughout the subsequent level of production.

ATC = TC / Q

AVC = TVC / Q

MC = Change in TC / Change in Q

TR = Price * Quantity

MR = Change in TR / Change in Q

Profit/Loss = TR - TC

b) Ans:  The profit maximizing level of output is 3 units and the amount of economic profit of the firm is MYR 6.

Explanation:

Under perfect competition , the profit maximization condition is where price equals marginal cost ( P = MC).

c) , i . Ans:  At a market product price of MYR 3 ,  the firm will not produce in the short run.

Profit at each level of output;

Quantity	TC	TVC	ATC	AVC	MC	TR	MR	Profit /loss
0	3	0	--	--	--	0	--	-3
1	6	3	6	3	3	3	3	-3
2	12	9	6	4.5	6	6	3	-6
3	21	18	7	6	9	9	3	-12
4	33	30	8.25	7.5	12	12	3	-21
5	49	46	9.80	9.2	16	15	3	-34

Explanation:

Under perfect competiton , the shut down point occurs where price equals to average variable cost ( P = AVC) or price is less tahn the  average variable cost ( P < MC).

c) , ii . Ans:  At a market product price of MYR 16 ,  the firm will produce in the short run.

Profit at each level of output;

Quantity	TC	TVC	ATC	AVC	MC	TR	MR	Profit /loss
0	3	0	--	--	--	0	--	-3
1	6	3	6	3	3	16	16	10
2	12	9	6	4.5	6	32	16	20
3	21	18	7	6	9	48	16	27
4	33	30	8.25	7.5	12	64	16	31
5	49	46	9.80	9.2	16	80	16	31

Explanation:

Under perfect competition , the profit maximization or loss minimization condition is where price equals marginal cost ( P = MC) . At price MRY 16 , the firm is maximizing profit at 5 units of output.