Question

Total Product	Average Fixed Cost	Average Variable Cost	Average Total Cost	Marginal Cost
1	$100.00	$17.00	$117.00	$17
2	50.00	16.00	66.00	15
3	33.33	15.00	48.33	13
4	25.00	14.25	39.25	12
5	20.00	14.00	34.00	13
6	16.67	14.00	30.67	14
7	14.29	15.71	30.00	26
8	12.50	17.50	30.00	30
9	11.11	19.44	30.55	35
10	10.00	21.60	31.60	41
11	9.09	24.00	33.09	48
12	8.33	26.67	35.00	56

The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for the firm's product is $32, the competitive firm will produce

A. 8 units at an economic profit of $16.

B. 6 units at an economic profit of $7.98.

C. 10 units at an economic profit of $4.

D. 7 units at an economic profit of $41.50.

The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for the firm's product is $28, the competitive firm will

A. produce 4 units at a loss of $17.40.

B. produce 7 units at a loss of $14.00.

C. shut down in the short run.

D. produce 6 units at a loss of $23.80.

The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for the firm's product is $12, the competitive firm should produce

A. 4 units at a loss of $109.

B. 4 units at an economic profit of $31.75.

C. 8 units at a loss of $48.80.

D. zero units at a loss of $100.

Answer 1

(1)

In order to maximize profit a firm produces that quantity at which P = MC and if ther eis no such quantity at which P = MC then it will produce that last quantity at which P > MC where P = price and MC = marginal. Alsi If P = MC < AVC. The this firm should shut down and produce 0 units.

Here P = 32. There is no quantity at which MC = P = 32. Last quantity at which P > MC is Q = 8. Hence he should produce 8 units.(Note P = MC > ATC > AVC. This firm should not shut down)

Profit = P*Q - ATC*Q where P = price = 32, ATC = average total cost = 30(ATC when Quantity(Q) = 8) and Q = quantity = 8.

=> Profit = 32*8 - 30*8 = 16

Hence, the correct answer is (A) 8 units at an economic profit of $16.

(2)

In order to maximize profit a firm produces that quantity at which P = MC and if ther eis no such quantity at which P = MC then it will produce that last quantity at which P > MC where P = price and MC = marginal. Alsi If P = MC < AVC. The this firm should shut down and produce 0 units.

Here P = 28. There is no quantity at which MC = P = 28. Last quantity at which P > MC is Q =7. Hence he should produce 7 units.(Note P > AVC when quantity(Q) = 7. This firm should not shut down)

Profit = P*Q - ATC*Q where P = price = 28, ATC = average total cost = 30(ATC when Quantity(Q) = 8) and Q = quantity = 7.

=> Profit = 28*7 - 30*7 = -14, means that this firm will incur a loss

Hence, the correct answer is (B) produce 7 units at a loss of $14.00.

(3)

In order to maximize profit a firm produces that quantity at which P = MC and if ther eis no such quantity at which P = MC then it will produce that last quantity at which P > MC where P = price and MC = marginal. Alsi If P = MC < AVC. The this firm should shut down and produce 0 units.

Here P = 12. Here, quantity at which MC = P = 12 is Quantity(Q) = 4.. When Q = 4, AVC = 14.25 > P . Hence, this firm should shut down and produce 0 units.

As, he is not producing anythingm thus quantity produced and sold = 0. So TR = 0. Also he is not hiring any variable input implies variable cost = 0. As Fixed cost is fixed whether he produces or not. So he will still incurr fixed cost = 100(Note when quantity = 1, then Fixed cost = AFC*Q = 100*1 = 100)

=> Profit = TR - TC = 0 - (0 + 100) = -100, means that this firm will incur a loss

Hence, the correct answer is (D) zero units at a loss of $100.