Question

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?

Answer 1

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