Question

Consider the following cost information for a firm that operates in a perfectly competitive market. Labor is a variable input.

Q (quantity of output)	Total cost ($)
0	15
1	25
2	45
3	75
4	110
5	165
6	225

OUTCOME #1: Suppose that the market price is $20. State the condition for the optimal quantity of output.   Using the condition, find the quantity of output that the firm should produce in the short run.   

OUTCOME #2: In the short run, should the firm produce the optimal quantity of output derived in previous question, or shut down immediately?   Give a detailed reason for your answer.

( Please help me, I really appreciate it!! )

Answer 1

Following is the required table -

Q	Total Cost	Fixed Cost	Variable Cost	AVC	MC
0	15	15	0	0	-
1	25	15	10	10	10
2	45	15	30	15	20
3	75	15	60	20	30
4	110	15	95	23.75	35
5	165	15	150	30	55
6	225	15	210	35	60

Outcome 1

A perfectly competitive firm maximizes profit or produces optimal quantity of output when it produce that level of output corresponding to which price equals marginal cost.

The condition for the optimal quantity of output is as follows P = MC.

The market price is $20.

The above table shows that market price is equal to marginal cost corresponding to output of 2 units.

So,

The firm should produce 2 units in the short-run.

Outcome 2

A firm generally shuts down immediately if at the level of output produced, price is less than AVC.

The optimal quantity of output produced by firm is 2 units.

The AVC corresponding to 2 units is $15.

The market price is $20.

Since, at optimal quantity of output, price is greater than AVC, the firm should continue to produce the optimal quantity of output derived in previous question in the short-run.