Question

1. Below is a cost and revenue table for a perfectly competitive firm producing purple-spotted people eaters. Fill in the missing information assuming that market price is $24.

Q         FC       TC      MC     ATC               MR                 TR                  Profit

0          105      105      N/A     N/A

1          105      135      30        135   

2          105      160      25        80

3          105      180      20        60

4          105      195      15        48.75   

5          105      215      20        43

6          105      250      35        41.67   

7          105      295      45        42.14   

8          105      355      60        44.375   

2. What is the profit maximizing (or loss-minimizing) level of output for this firm? (Assume there are no fractional levels of output – the firm can produce two people eaters or three people eaters, but not 2.5 or 3.75 people-eaters.)

3. We usually say that the competitive firm maximizes profits by choosing the output level that makes MC=MR – but that isn’t exactly true here at the optimal level of people-eater output. Why not?

4. What is the break-even price for this firm?

5. At the profit-maximizing level of output, does this firm achieve productive efficiency? How do you know?

6. If this firm is a rational, profit-maximizing firm, what level of output will it produce?

Answer 1

Part (1)

output	fixed cost,FC	total variable cost,TVC	total cost,TC	marginal cost,MC	average variable cost,AVC	average total cost,ATC	total revenue,TR	average revenue,AR	marginal revenue,MR	profit	gross profit margin=AR-AVC
0	105	0	105	-	-	-	0	-	-	-105	-
1	105	30	135	30	30	135	24	24	24	-111	-6
2	105	55	160	25	27.5	80	48	24	24	-112	-3.5
3	105	75	180	20	25	60	72	24	24	-108	-1
4	105	90	195	15	22.5	48.75	96	24	24	-99	1.5
5	105	110	215	20	22	43	120	24	24	-95	2
6	105	145	250	35	24.167	41.66667	144	24	24	-106	0.167
7	105	190	295	45	27.142	42.14286	168	24	24	-127	3.142
8	105	250	355	60	31.25	44.375	192	24	24	-163	-7.25

Part (2)

firm is making losses at all levels of output. Losses are minimized when firm produces 5 units of output

Part (3)

if the firm chooses level of output where marginal cost equals marginal revenue, then firm produces 2 units of output. At this level of output, marginal cost is not exactly equal to marginal revenue, but closest. At this level of output, losses are not minimized

Part (4)

at break even point firm earns zero profit that is total revenue equals total cost

losses are minimum when output is 5 units

Part (5)

at profit maximizing level of output of 5 units, average total cost is not at its minimum level. Therefore, productive efficiency is not achieved

Part (6)

A rational profit maximizing firm would produce 5 units of output because losses are minimized