Question

Q/1

Werner & Sons is a manufacturer of three-ring binders operating in a perfectly competitive industry. The below table shows the firm's cost schedule.

	Quantity (cases) Variable Cost Total Cost Marginal Cost Average Variable Cost Average Total Cost 0 $0 $76 -- -- $76 1 30 106    $ $30 106 2 50 20 25 3 134 8 19.33 44.67 4 64 140 6 35 5 84 160 20 16.8 32
	Use the table to answer the following questions. Complete the above table by filling in the blank cells.                   Werner is selling in a perfectly competitive market at a price of $6. What is the profit maximizing or loss-minimizing output? Explain your answer. Calculate the firm's profit or loss at the profit maximizing output.

Answer 1

1)
Solution:

Quantity   VC   TC   MC   AVC   ATC   FC     
0   0   76           76   76     
1   30   106   30   30   106   76     
2   50   126   20   25   63   76     
3   58   134   8   19.33   44.67   76     
4   64   140   6   16   35   76     
5   84   160   20   16.8   32   76     

Working:
Formulas used:
TC = FC + VC
MC is change in total cost by increasing output with one unit
ATC =TC / Units of output
AFC = FC / Units of output
AVC = VC/ Units of output

2) Profit maximizing output is where MR = MC; and it occurs at 4 units when MR = MC = 6

3) TR at 4 units = 6 * 4 = 24; TC = 140; Profit/loss = TR - TC = 24 -140 = -116