Question

The following information describes the costs for a firm in a perfectly competitive market. Fill in the cells (4 points) then answer the questions that follow.

Quantity	Variable Cost	Fixed Cost	Total Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0	0	$300		--
1	$110
2	$190
3	$250
4	$360
5	$510
6	$685

1. If the market price for this good is $150, what is the profit maximizing level of output for the firm? Show your work and/or explain.
2. What is the total cost for the output you found in #1 above? Show your work.
3. What is the total revenue for the output you found in #1 above? Show your work.
4. Based on your answers to 2 and 3, is the firm making a profit or loss? Explain.
5. At this price, in the short run, will the firm continue producing or shut down in the short run? Explain.
6. At this price, in the long run, will new firms enter this market or will this firm exit the market? Explain.
7. If the market price increases to $175, does this change the firm’s decisions about either shutting down or entering/leaving the market? Explain.

Answer 1

Ans:

Quantity	Variable Cost	Fixed Cost	Total Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0	$0	$300	$300	----	----	----
1	110	300	410	$110	$410	$110
2	190	300	490	95	245	80
3	250	300	550	83.33	183.33	60
4	360	300	660	90	165	110
5	510	300	810	102	162	150
6	685	300	985	114.17	164.17	175

Explanation:

Total cost = Total fixed cost + Total variable cost

AVC = TC / Q

ATC = TC / Q

MC = Change in TC / Change in Q

Ans: The profit maximizing level of output for the firm is 5.

Explanation:

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

Ans: The total cost is $810

Ans: the total revenue is $750

Ans: The firm is making a loss.

Explanation:

Profit / Loss = $750 - $810 = - $60

Ans:  At this price , in the short run , the firm will continue producing.

Explanation:

At this price , in the shut run , the firm will continue producing because at this production level , price is greater than average variable cost ( P > AVC).

Ans: At this price , in the long run this firm will exit the market.

Ans: Yes

Explanation:

If the market price increases to $175 , it changes the firm's decision about either shutting down or entering / leaving the market. At this price , the firm earns profit . So the firm will not shut down .