Question

The following table shows the short-run cost data of a perfectly competitive firm. Assume that output can only be increased in batches of 100 units.

Quantity	Total Cost (dollars)	Variable Cost (dollars)
0	$1000	$0
100	1360	360
200	1560	560
300	1960	960
400	2760	1760
500	4000	3000
600	5800	4800

a. Explain how a firm chooses quantity to maximise profit in a competitive market.

b. What is the firm’s fixed cost? (1 mark)

c. Suppose that market price is $8. What is the profit maximising level of output

d. Suppose that market price is $8. What is the firm’s profit?

e. Suppose the fixed cost of production rises by $500 and the price per unit is still $8. What happens to the firm’s profit-maximising output level?

f. What is the price level below which the firm will not produce in the short run?

Answer 1

a. A perfectly competitive firm chooses to produce quantity where MC=MR=P

b. It is the cost at quantity =0 hence Fixed cost is $1000

c.

Quantity	Total Cost	Variable Cost	MC	TR	Profit at P=8	AVC
0	1000	0
100	1360	360		800	-560.0	3.6
200	1560	560	2	1600	40.0	2.8
300	1960	960	4	2400	440.0	3.2
400	2760	1760	8	3200	440.0	4.4
500	4000	3000	12.4	4000	0.0	6
600	5800	4800	18	4800	-1000.0	8

Profit maximizing level of output is 400 where MC=MR

d. From the above table we can observe that profit = $440

e.

Quantity	Total Cost	Variable Cost	MC	Profit at P=8
0	1500	0
100	1860	360		-1060.0
200	2060	560	2	-460.0
300	2460	960	4	-60.0
400	3260	1760	8	-60.0
500	4500	3000	12.4	-500.0
600	6300	4800	18	-1500.0

Loss minimising output level is 400

f. A firm will not produce below minimum AVC level (as it cannot cover variable expenses) and here in the above case it is at minimum AVC of 2.8