Question

Cost of Competitive Firm

In Stockholm, there is a competitive market for the production of canopy beds. Max’s canopy bed production firm can make at most six canopy bed’s per week.

Quantity	Fixed Cost ($)	Variable Cost ($)	Total Cost ($)	Marginal Cost ($)
0		0	5000	---
1	5000			2000
2		6000
3				6000
4				8000
5			35000
6		42000

Complete the four cost columns in the table above.

If the market price of pianos is $6000 this week, how many canopy beds should Max’s firm produce to maximise profit?

What would Max’s profit be this week? $

Answer 1

Quantity	Fixed cost	Variable cost	Total cost	Marginal cost
	(Dollars)	(Dollars)	(Dollars)	(Dollars)
0	5000	0	5000	-
1	5000	2000	7000	2000
2	5000	6000	11000	4000
3	5000	12000	17000	6000
4	5000	20000	25000	8000
5	5000	30000	35000	10000
6	5000	42000	47000	8000
marginal cost is the increase in total cost due to the production of one more unit.
When production is increased from 0 to 1, then MC increases by $2000, so the increase in total cost should be $2000, to $7000
Variable cost is Total cost- Fixed cost = $7,000-$5,000=$2000
Fixed cost is $5,000 as it is incurred even when there is no production and remains the same throughout.
MC of second unit is $11,000 - $7,000 = $4,000.
Profit maximization for a perfectly competitive firm occurs when MR= MC. MR is P, which is $6,000.
Profit maximization output is 3 pianos.
Total profit = Total revenue - total cost
Total revenue= P x Q= $6000 x 3= $18,000
Total cost when 3 pianos are produced is $17,000. Profit is $18,000 - $17,000= $1,000. this week.
Total cost = Fixed Cost + Variable costs
Fixed cost is the same for all quantity produced.
Variable costs varys with output.