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

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

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

A.

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

b.

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.

c.

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 2 years ago
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