Question

A firm has provided you with the following information:

Output 30, Variable Cost $1,900, Fixed Cost $120,Marginal Cost $50, Price $50

Instructions: To indicate a loss enter a (-) in front of your answer. A positive entry is considered a profit.

1. What is the firm's short-run profit if they produce using the MC=MR rule?

2. What is the firm's short-run profit if they produce nothing?

3. What will be the firm's production decision in the short-run?

a. Shutdown

b. Exit

c. Operate

Answer 1

(a). Output produced = 30

Price = $50

Total revenue = output *Price

Total revenue = 30 * $50

Total revenue = $1500

Total Cost= Variable cost + fixed cost.

Total Cost = $1900 + 120

Total Cost = $2020

At profit maximization or loss minimization point, MR = MC.

Corresponding to an output level of 30, MR=MC =$50   

Note: Price is constant at $50. So, the marginal revenue will be $50 at each level of output

Profit = Total revenue - Total Cost.

Profit = $1500 - $2020

Profit = -$520.

The firm's short-run profit is -$520 if they produce using MR=MC.

(b) If a firm produces nothing, then a firm has to bear a fixed cost of $120.

It means there is a loss of $120 or a profit of -$120.

So, short-run profit is -$120 if they produce nothing.

(c) In the short run, if the firm produces then bear a loss of $520

if a firm produces nothing then bear a loss of $120.

So, it is better to shut down the production in the short run in order to minimize the loss of the firm.