Question

Quantity, Q	AFC	AVC	ATC	MC	P	AR=P	TR=P*Q	MR=P
0					56		0
1	60	45.00	105.00	45.00	56	56	56	56
2	30	42.50	72.50	40.00	56	56	112	56
3	20	40.00	60.00	35.00	56	56	168	56
4	15	37.50	52.50	30.00	56	56	224	56
5	12	37.00	49.00	35.00	56	56	280	56
6	10	37.50	47.50	40.00	56	56	336	56
7	8.57	38.57	47.14	45.00	56	56	392	56
8	7.5	40.63	48.13	55.00	56	56	448	56
9	6.67	43.33	50.00	65.00	56	56	504	56
10	6	46.50	52.50	75.00	56	56	560	56

(b). Now assume that product price falls to $41.

(1) Will the firm produce in the short-run at the price? Of $41? Explain why?

(2) If yes, how many units? Is this output profit-maximizing or loss minimizing? What would be profit/loss? (show all your calculations). Show the firm equilibrium on a separate graph using average cost curves.

(c). Assume price drops further to $32.

(1) Will this firm produce or not? Explain if not, why not? Determine profit/losses and show your answer graphically using average/marginal cost curves.

Answer 1

(b). Now assume that product price falls to $41.

P=$41
Quantity, Q	AFC	AVC	ATC	MC	P	AR=P	TR=P*Q	MR=P	Profit
0					41		0
1	60.0	45.0	105.0	45	41	41	41	41	-64.0
2	30.0	42.5	72.5	40	41	41	82	41	-63.0
3	20.0	40.0	60.0	35	41	41	123	41	-57.0
4	15.0	37.5	52.5	30	41	41	164	41	-46.0
5	12.0	37.0	49.0	35	41	41	205	41	-40.0
6	10.0	37.5	47.5	40	41	41	246	41	-39.0
7	8.6	38.6	47.1	45	41	41	287	41	-43.0
8	7.5	40.6	48.1	55	41	41	328	41	-57.0
9	6.7	43.3	50.0	65	41	41	369	41	-81.0
10	6.0	46.5	52.5	75	41	41	410	41	-115.0

(1) Will the firm produce in the short-run at the price? Of $41? Explain why?

The firm will keep producing as the price $41 is greater than the shut down point, i.e. the minimum of average variable cost of production ($37.5). Till the time the firm is able to cover its variable costs from the revenues the firm will not shut down.

(2) If yes, how many units? Q* at P=MC is Q* = 6 units

Is this output profit-maximizing or loss minimizing? At this point of max output the firm is minimizing losses ($39).

What would be profit/loss? The loss would equal to the total cost – total revenue

Total cost = ATC*Q = 47.5*6 = $285

Total revenue = P*Q = 41*6 = $246

Loss = 285-246 = $39

Show the firm equilibrium on a separate graph using average cost curves.

(c). Assume price drops further to $32.

P=$32
Quantity, Q	AFC	AVC	ATC	MC	P	AR=P	TR=P*Q	MR=P	Profit
0					32		0
1	60.0	45.0	105.0	45	32	32	32	32	-73.0
2	30.0	42.5	72.5	40	32	32	64	32	-81.0
3	20.0	40.0	60.0	35	32	32	96	32	-84.0
4	15.0	37.5	52.5	30	32	32	128	32	-82.0
5	12.0	37.0	49.0	35	32	32	160	32	-85.0
6	10.0	37.5	47.5	40	32	32	192	32	-93.0
7	8.6	38.6	47.1	45	32	32	224	32	-106.0
8	7.5	40.6	48.1	55	32	32	256	32	-129.0
9	6.7	43.3	50.0	65	32	32	288	32	-162.0
10	6.0	46.5	52.5	75	32	32	320	32	-205.0

(1) Will this firm produce or not? Explain if not, why not?

The firm will stop producing as the price $32 is less than the shut down point, i.e. the minimum of average variable cost of production ($37.5). This time the firm is unable to cover its variable costs from the revenues the firm will therefore shut down.

Determine profit/losses and show your answer graphically using average/marginal cost curves.

Total cost = ATC*Q = 52.5*4 = $210

Total revenue = P*Q = 32*4 = $128

Loss = 210-128 = $82