Question

The following table shows the costs that a firm faces in a perfect competitive market:

Output	Fixed Cost	Variable Cost	Total Cost	Average Total Cost	Marginal Cost
0		0
1		40
2		100
3		170
4		250
5		360
6		580
7		920

a.    Taking into account that the firm has a fixed cost of $200, complete the table. (20 points)

b.    If the market price is $340, what is the level of output that the firm should produce in order to maximize profit? Calculate the maximum profit. (5 points)

c.     If the market price falls to $110, how much the firm should produce, how much are the profits and what should the firm do in the long run? (5 points)

Answer 1

Part a) Following is the completed table:

Output	TFC	TVC	TC	AFC	AVC	AC	MC
0.00	200.00	0.00	200.00
1.00	200.00	40.00	240.00	200.00	40.00	240.00	40.00
2.00	200.00	100.00	300.00	100.00	50.00	150.00	60.00
3.00	200.00	170.00	370.00	66.67	56.67	123.33	70.00
4.00	200.00	250.00	450.00	50.00	62.50	112.50	80.00
5.00	200.00	360.00	560.00	40.00	72.00	112.00	110.00
6.00	200.00	580.00	780.00	33.33	96.67	130.00	220.00
7.00	200.00	920.00	1120.00	28.57	131.43	160.00	340.00

• TFC remains the same for all units of output.
• TC = TFC+TVC
• AFC = TFC/output
• AVC = TVC/output,
• AC = TC/output
• 

Part b)

if price = 340

Output	TFC	TVC	TC	AFC	AVC	AC	Price = AR	TR	Profit	MR	MC
0.00	200.00	0.00	200.00				340.00	0.00	-200.00
1.00	200.00	40.00	240.00	200.00	40.00	240.00	340.00	340.00	100.00	340.00	40.00
2.00	200.00	100.00	300.00	100.00	50.00	150.00	340.00	680.00	380.00	340.00	60.00
3.00	200.00	170.00	370.00	66.67	56.67	123.33	340.00	1020.00	650.00	340.00	70.00
4.00	200.00	250.00	450.00	50.00	62.50	112.50	340.00	1360.00	910.00	340.00	80.00
5.00	200.00	360.00	560.00	40.00	72.00	112.00	340.00	1700.00	1140.00	340.00	110.00
6.00	200.00	580.00	780.00	33.33	96.67	130.00	340.00	2040.00	1260.00	340.00	220.00
7.00	200.00	920.00	1120.00	28.57	131.43	160.00	340.00	2380.00	1260.00	340.00	340.00

• TR = Price x output
• 
• Profit = TR - TC
• So the profit is maximized at 7 nits of output when MR = MC

Part c)

If price = 110

Output	TFC	TVC	TC	AFC	AVC	AC	Price = AR	TR	Profit	MR	MC
0.00	200.00	0.00	200.00				110.00	0.00	-200.00
1.00	200.00	40.00	240.00	200.00	40.00	240.00	110.00	110.00	-130.00	110.00	40.00
2.00	200.00	100.00	300.00	100.00	50.00	150.00	110.00	220.00	-80.00	110.00	60.00
3.00	200.00	170.00	370.00	66.67	56.67	123.33	110.00	330.00	-40.00	110.00	70.00
4.00	200.00	250.00	450.00	50.00	62.50	112.50	110.00	440.00	-10.00	110.00	80.00
5.00	200.00	360.00	560.00	40.00	72.00	112.00	110.00	550.00	-10.00	110.00	110.00
6.00	200.00	580.00	780.00	33.33	96.67	130.00	110.00	660.00	-120.00	110.00	220.00
7.00	200.00	920.00	1120.00	28.57	131.43	160.00	110.00	770.00	-350.00	110.00	340.00

Till the output is 6 units, AR >AVC so the loss by shutting down is more than the loss by producing, so the firm should produce. At output of 7 firm should shut down because then loss will be only 200 of TFC while loss in producing is 350

Loss is minimized at 5 units of output when MR = MC