Question

The following table represents short run cost-revenue information (in dollars) for a firm in a competitive market.

Q	P	TR	MR	MC	TC	Total Profit
0			N/A	N/A
1				60
2				50
3
4					660
5
6					700
7					730
8					770
9				60
10				80

(a) Fill in all the blanks above using the following information: The Total Fixed Cost is $480. The Market Price is $40 per unit of output, the ATC of producing 3 units of output is $210, and the TVC of producing 5 units of output is $200

(b) Where does diminishing returns start? __________

(c) In the Short Run, if this firm would go into production, determine the profit maximizing (or loss minimizing) level of output and profit amount. _______________

(d) In the Short Run, if this firm would instead shutdown without going into production, determine its production amount and profit amount._________________

(e) Please determine the best course of action for this firm in the Short Run._____________

(f) Based on the data above, in the Long Run,explain what this firm should do. ____________

        

Answer 1

(a) P= $40

TFC= $480

TVC for Q=5 is $200

ATC for Q=3 is $210

Q	P	TR=(P)(Q)	MR= Change in TR	TC=TFC+TVC=summation of MC= ATC(Q)	AVC=TVC/Q	MC=Change in TC	Total profit = TR-TC
0	40	-	-	480	-	-	-480
1	40	40	40	480+60= 540	(540-480)/1= 60	60	-500
2	40	80	40	(540+50)= 590	(590-480)/2=55	50	-510
3	40	120	40	(210)(3)=630	(630-480)/3=50	(630-590)=40	-510
4	40	160	40	660	(660-480)/4=45	(660-630)=30	-500
5	40	200	40	(480+200)= 680	(680-480)/5=40	(680-660)=20	-480
6	40	240	40	700	(700-480)/6=36.67	(700-680)=20	-460
7	40	280	40	730	(730-480)/7=35.17	(730-700)=30	-450
8	40	320	40	770	(770-480)/8=36.25	(770-730)=40	-450
9	40	360	40	(770+60)=830	(830-480)/9=38.9	60	-470
10	40	400	40	(830+80)=890	(890-480)/10=41	80	-490

(b) The diminishing returns start in after Q=6 units ,i.e when MC starts rising.

(c) Profit maximizing level of output is when P=MC, so Q=3 units. Loss= -$510.

(d) In the short run , if this would instead shut down , this happens when P=Minimum AVC,i.e when Q=7 units. Loss would be equal to fixed cost = -$480.

(e) The firm would produce 3 units in the short run ,this is the best course of action in the short run to continue to produce because PAVC.

(f) Because this firm earn negative economic profit, so firm would exit the market in the long run.