Question

In: Economics

a) Find ABC’s average fixed costs, average variable costs, average total costs and marginal costs.

Quantity	Total Fixed Cost	Total Variable Cost
0	100	0
1	100	50
2	100	70
3	100	90
4	100	140
5	100	200
6	100	360

b) Since ABC is charging the customers at the price of $50, it seems that the company cannot make a profit. The owner decides to shut down operations. What are ABC’s profits/losses? Should the owner shut down operations? Explain.

c) Economic adviser suggested that it is better to produce unit of output, because marginal revenue equals marginal cost at the quantity. What are the ABC's profit /losses at the level of production? Was this the best decision? Explain.

Solutions

Expert Solution

Q	TFC	TVC	TC	AFC	AVC	ATC	MC
0	100	0	100
1	100	50	150	100	50	150	50
2	100	70	170	50	35	85	20
3	100	90	190	33.33	30	63.33	20
4	100	140	240	25	35	60	50
5	100	200	300	20	40	60	60
6	100	360	460	16.67	60	76.67	160

TC=VC+FC

AFC=FC/Q

AVC=VC/Q

ATC=TC/Q

MC=Change in TC/change in Q

What are ABC’s profits/losses?

losses=100.

when the firm shutdowns loss will be equal to FC.

FC is 100 at every level of output.

Should the owner shut down operations? Explain.

no.

Explanation:

the firm maximizes its profit where MR=MC. in perfect competition price=MR. here at Q4, MR=MC.

because at profit-maximizing Quantity, price is greater than AVC firm will operate. minimum AVC is 30 so above 30 at any price, the firm should produce even if the firm making a loss.

What are the ABC's profit /losses at the level of production?

profit=TR-TC

=200-240

=-40.

TR=P*Q

=50*4

=200

firm maximizes its profit where MR=MC. for price-taking firm MR=price. so here at price50. the firm will produce Q4 to maximize profit.

Was this the best decision? Explain.

yes. because if firm shutdowns loss is equal to fixed cost that is 100. and if it is producing loss equals to 40. so it is better to produce to minimise losses.

Rahul Sunny answered 1 year ago

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