Question

A firm operates in a competitive industry, in which the price is $8 per unit. Its fixed cost is $10 and its variable costs are given in the table.
Output	Variable Cost
1	2
2	3
3	5
4	10
5	16
6	24
7	35
8	48
Based on the information above,
a) Compute the firm’s revenues, total costs, and marginal cost at each level of output (show in a table). 12 points
b) Determine the profit-maximizing level of output for the firm. What is the maximum profit? 2 points
c) If this firm is typical of the industry, will entry occur? Explain why or why not. 1 point

Answer 1

a. Compute the firm’s revenues, total costs, and marginal cost at each level of output:

Output	Revenue	Fixed Cost	Variable Cost	Total Cost	Marginal Cost (increase in cost per additional unit of production)
1	$       8.00	$       10.00	$                  2.00	$    12.00
2	$    16.00	$       10.00	$                  3.00	$    13.00	$                1.00
3	$    24.00	$       10.00	$                  5.00	$    15.00	$                3.00
4	$    32.00	$       10.00	$                10.00	$    20.00	$                8.00
5	$    40.00	$       10.00	$                16.00	$    26.00	$              14.00
6	$    48.00	$       10.00	$                24.00	$    34.00	$              22.00
7	$    56.00	$       10.00	$                35.00	$    45.00	$              33.00
8	$    64.00	$       10.00	$                48.00	$    58.00	$              46.00

b) Profit is calculated as shown below:

Output	Revenue	Fixed Cost	Variable Cost	Total Cost	Profit = Revenue - Total Cost
1	$       8.00	$       10.00	$                  2.00	$    12.00	$            -4.00
2	$    16.00	$       10.00	$                  3.00	$    13.00	$              3.00
3	$    24.00	$       10.00	$                  5.00	$    15.00	$              9.00
4	$    32.00	$       10.00	$                10.00	$    20.00	$            12.00
5	$    40.00	$       10.00	$                16.00	$    26.00	$            14.00
6	$    48.00	$       10.00	$                24.00	$    34.00	$            14.00
7	$    56.00	$       10.00	$                35.00	$    45.00	$            11.00
8	$    64.00	$       10.00	$                48.00	$    58.00	$              6.00

From the table, we can see maximum Profit is $14 (which can be at either level 5 or 6 units of output). We takle the first, that is output level of 5 as profit maximizing

c. Yes, entry wil occur becuase the firm is able to make profits at output level 2 and above