Question

Consider the following cost data for a perfectly competitive firm:

Output (Q)	Total Fixed Cost (TFC)	Total Variable Cost (TVC)
1	100	120
2	100	200
3	100	290
4	100	430
5	100	590

a. If the market price is $140, how many units of output will the firm produce in order to maximize profit in the short run?
b. Find out economic profit or loss at the short-run profit maximizing output level.
c. What will be the price and quantity in the long run equilibrium?

Use illustration where possible

Answer 1

Q	TFC ($)	TVC ($)	TC ($)	AC ($)	MC ($)
1	100	120	220	220	120
2	100	200	300	150	80
3	100	290	390	130	90
4	100	430	530	132.5	140
5	100	590	690	138	160

TC = TFC + TVC

AC = TC/Q

MC (nth unit) = TC (n units) - TC ((n-1) units)

a) Profit would be maximized where P > = MC for the last unit sold.

Therefore, output where profit would be maximized = 4 units

b) Economic profit = P x Q - TC = 4 x 140 - 530 = 30

c) In a competitive market, price in the long run = average cost (minimum)

As can be seen from the table above, AC (minimum) = $130

P (long run) = 130

Q = 3 units