Question

1. Assume the following cost data for XYZ industries, a firm that participates in a perfectly competitive market.  Use this data to answer the following questions.

Output	Average Fixed Cost	Average Variable Cost	Average Total Cost	Total Cost	Marginal Cost
0	-	-	-	0	0
1	60	45	105
2	30	42.50	72.50
3	20	40	60
4	15	37.50	52.50
5	12	37.00	49
6	10	37.50	47.50
7	8.57	38.57	47.14
8	7.50	40.63	48.13
9	6.67	43.33	50
10	6.00	46.50	52.20

1. Fill in the Total Cost and Marginal Cost data above.

2. If price is $56 then what level of output would maximize profit?  What would profit be?

3. If price is $41 then what level of output would maximize profit?  What would profit be?

4. If price is $32 then what level of output would maximize profit?  What would profit be?

5. Fill in the following information, and assume XYZ industries is the typical firm in the market:

Price	Quantity Supplied	Profit or Loss (dollar amount)	Quantity supplied if 1500 firms in the market
26
32
38
41
46
56
66

Answer 1

Output	Average Fixed Cost	Average Variable Cost	Average Total Cost	Total Cost	Marginal Cost
0	-	-	-	0	0
1	60	45	105	105	105
2	30	42.5	72.5	145	40
3	20	40	60	180	35
4	15	37.5	52.5	210	30
5	12	37	49	245	35
6	10	37.5	47.5	285	40
7	8.57	38.57	47.14	329.98	44.98
8	7.5	40.63	48.13	385.04	55.06
9	6.67	43.33	50	450	64.96
10	6	46.5	52.5	525	75

Total Cost = Output x Average Cost

Marginal Cost of nth unit = Total Cost of 'n' units - Total Cost of 'n-1' units

In a perfectly competitive market, profit maximisation condition is Marginal Revenue = Price = Marginal Cost

If there is no output at which MC exactly matches with price, then the maximum output up to which the MC remains lower than the price is the profit maximising output

b) When the Price = $56, profit is maximised at the quantity at which MC = $56

Maximum output up to which the MC remains less than $56 is 8 units

Profit maximising output = 8 units

Total Revenue = Output x Price = 8 x $56 = $448

Profit = Total Revenue - Total Cost = $448 - $385.04 = $62.96

c) When the Price = $41, profit is maximised(loss is minimised) at the quantity at which MC = $41

Maximum output up to which the MC remains less than $41 is 6 units

Profit maximising(loss minimising) output = 6 units

Total Revenue = Output x Price = 6 x $41 = $246

Profit(Loss) = Total Revenue - Total Cost = $246 - $285 = -$39 (Loss)

d) When the Price = $32, profit is maximised(loss is minimised) at the quantity at which MC = $32

Maximum output up to which the MC remains less than $32 is 4 units

Profit maximising(loss minimising) output = 4 units

Total Revenue = Output x Price = 4 x $32 = $128

Profit(loss) = Total Revenue - Total Cost = $128 - $210 = -$82(loss)

e)

Price	Qty Supplied	Profit/Loss	Qty Supplied by 1500 firms
26	0	0	0
32	4	-82	6000
38	5	-55	7500
41	6	-39	9000
46	7	-7.98	10500
56	8	62.96	12000
66	9	144	13500

Quantity supplied by 1500 firms = quantity supplied by each firm x 1500