Question

A firm in a perfectly competitive industry knows the following about its costs and revenue. The firm would like to maximize profit and has hired a consultant for advice.

Price           Q of Output              Total Revenue              Total Cost               Total Fixed Cost

P?                  Q?                             7,400                           TC?                           3,300

Total Variable Cost          Average Total Cost          Average Variable Cost         MC                  

       TVC?                                 9                                   3                                5

Part 1. Average Fixed Cost ____

Part 2. Price _____

Part 3: Quantity _____

Part 4. Total Cost _____

Part 5. What is the value of the profit or loss (-) at the current output ( include the - sign if it's a loss) ____

Part 6. Consultant's Advice:   As a consultant, what advice would you give to this firm:(Choose ONE answer from the following) **worth 5 marks _______

  
1. Firm should do nothing; it is already profit maximizing/loss minimizing

2. Firm should reduce quantity of output

3. Firm should increase quantity of output

4. Firm should shutdown operations

5. The given number set is inconsistent

Answer 1

TC = Total Fixed Cost + TVC

TVC = AVC * Q

TVC = 3Q

Total Fixed Cost = 3300

Part 1.

Average Total Cost = Average Variable Cost + Average Fixed Cost

9 = 3 + Average Fixed Cost

Average Fixed Cost = 6

Now, TFC = AFC * Q

3300 / 6 = Q

Q = 550

Part 2

Total Revenue = P * Q

7400 = 550P

P = 13.45

Part 3

Quantity = 550 (calculated above)

Part 4

TC = TFC + TVC

TC = 3300 + 3Q

TC = 3300 + 3*550

TC = 4950

Part 5

Profit = TR - TC

= 7400 - 4950

= 2450

Part 6

As the firm is making profit, it should increase the quantity of output.