Question

In: Economics

Market Forms The following questions address some of the price and output decisions faced by firms...

Market Forms

The following questions address some of the price and output decisions faced by firms other than those found in perfect competition. Some numbers may be rounded.

Table 1-a

Average Fixed cost

Average Variable Cost

Average Total Cost

Output

0

1

$   180.00

$ 135.00

$    315.00

2

$     90.00

$ 127.50

$    217.50

3

$     60.00

$ 120.00

$    180.00

4

$     45.00

$ 112.50

$    157.50

5

$     36.00

$ 111.00

$    147.00

6

$     30.00

$ 112.50

$    142.50

7

$     25.71

$ 115.70

$    141.41

8

$     22.50

$ 121.90

$    144.40

9

$     20.00

$ 130.00

$    150.00

10

$     18.00

$ 139.50

$    157.50

Table 1-a (continued)

Marginal Cost

Price

Total Revenue

Marginal Revenue

Output

0

$ 345.00

1

$ 300.00

2

$ 249.00

3

$ 213.00

4

$ 189.00

5

$ 165.00

6

$ 144.00

7

$ 126.00

8

$ 111.00

9

$   99.00

10

$   87.00

Questions:

  1. Complete Table 1. Summarize your calculations and use Microsoft Excel.
  2. Using Excel, draw one graph showing average fixed costs, average variable costs, average total costs, marginal revenue, and marginal costs.
  3. Using the data in the table and on your graph, what is the profit maximizing, or loss minimizing level of output? Explain and justify your answers.
  4. What is a normal profit? What is an economic profit? Explain your answer using examples. Are normal profits being earned in this example? Are economic profits present for this firm in this example? Explain your answers.
  5. Given the data in the table and the graph, how could you determine or identify the optimal plant size?
  6. What is the difference between explicit and implicit cost? Explain your answers.
  7. How would we determine if a cost is a fixed cost or a variable cost?

Solutions

Expert Solution

1.  

Output

Average Fixed cost

Average Variable Cost

Average Total Cost

TC

Marginal Cost

Price

Total Revenue

Marginal Revenue

Profit

0

180

0

345

0

0

1

180

135

315

315

315

300

300

300

-15

2

90

127.5

217.5

435

120

249

498

198

63

3

60

120

180

540

105

213

639

141

99

4

45

112.5

157.5

630

90

189

756

117

126

5

36

111

147

735

105

165

825

69

90

6

30

112.5

142.5

855

120

144

864

39

9

7

25.71

115.7

141.41

989.87

134.87

126

882

18

-107.87

8

22.5

121.9

144.4

1155.2

165.33

111

888

6

-267.2

9

20

130

150

1350

194.8

99

891

3

-459

10

18

139.5

157.5

1575

225

87

870

-21

-705

2.

3. Profit is maximum at Output = 4, as the MC is at its minimum

4. Normal profit is where total revenue = total costs
In a perfect completion, because of increased competition firm are forced to operate in a thin margin profit which makes to operate at TR=TC or zero profit
Economic profit is when total revenue is greater than total costs
This firm is earning economic profit as TR is greater than TC

5. Optimal plat size is where ATC is at its minimum and it is at output = 7
6.Explicit costs are directly paid out costs as material or input costs. Implicit include opportunity costs which are not paid out costs as opportunity cost of own labor

7. A cost is said to be fixed even when the output is zero which needs to be incurred


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