Question

The following table represents short run cost-revenue information (in dollars) for a firm in a competitive market.

Q	P	TR	MR	MC	TC	Total Profit
0			N/A	N/A	2,000
1					2,800
2					3,400
3				300
4					3,800
5					4,000
6				400
7				600
8				900
9
10

(a) Fill in all the blanks above using the following information: The Market Price is $500 per unit of output, the Average Variable Cost of producing 9 units of output is $800, and the Average Total Cost of producing 10 units of output is $860

(b) Where does diminishing returns start? Explain your answer.

(c) What is the Fixed Costs for this firm? Explain your answer.

(d) In the Short Run, if this firm would go into production, determine the profit maximizing (or loss minimizing) level of output and profit amount.

(e) In the Short Run, if this firm would instead shutdown without going into production, determine its production amount and profit amount.

(f) Please determine the best course of action for this firm in the Short Run.

(g) Based on the data above, in the Long Run, explain what this firm should do.

Answer 1

A)

TR=P*Q when P=500

MR=change in TR/change in Q

MC=change in TC/change in Q

TC=FC+VC

FC=2000

PROFIT = TR-TC

Q	P	TR	MR	MC	TC	PROFIT
0	500	0			2000	-2000
1	500	500	500	800	2800	-2300
2	500	1000	500	600	3400	-2400
3	500	1500	500	300	3700	-2200
4	500	2000	500	100	3800	-1800
5	500	2500	500	200	4000	-1500
6	500	3000	500	400	4400	-1400
7	500	3500	500	600	5000	-1500
8	500	4000	500	900	5900	-1900
9	500	4500	500	3300	9200	-4700
10	500	5000	500	-600	8600	-3600

B) diminishing returns start when MC starts increasing from Q = 5 as the cost of producing additional output increases which means that the marginal product of the labor is decreasing.

C) FC=2000 because when Q=0, the firms cost = 2000

The firm incurs fixed cost when it is producing zero units of output

D) The firm will set P=MC for profit maximization or loss minimization and produce Q = 6 units at which it will incur a loss of 1400

E) If it instead shuts down, then it will produce zero units and incurr a loss equal to its fixed cost of 2000

We need to find AVC and ATC to answer the next two parts

AVC=TVC/Q

TVC=TC-TFC

ATC=TC/Q

Q	P	TR	MR	MC	TC	PROFIT	ATC	AVC
0	500	0			2000	-2000
1	500	500	500	800	2800	-2300	2800	800
2	500	1000	500	600	3400	-2400	1700	700
3	500	1500	500	300	3700	-2200	1233.333	566.6667
4	500	2000	500	100	3800	-1800	950	450
5	500	2500	500	200	4000	-1500	800	400
6	500	3000	500	400	4400	-1400	733.3333	400
7	500	3500	500	600	5000	-1500	714.2857	428.5714
8	500	4000	500	900	5900	-1900	737.5	487.5
9	500	4500	500	3300	9200	-4700	1022.222	800
10	500	5000	500	-600	8600	-3600	860	660

F) At the loss minimizing output of 6 units, the firm is able to recover its average variable cost because the price is greater than minimum AVC so it shoud continue to produce in the short run

G) In the long run, the firm should exit the market as it is unable to recover its total costs as in the long run, the price = Minimum ATC and the firm should break even in order to keep operating.