In: Economics
1. Complete the table below, and then answer the following questions.
Q |
TC |
TFC |
TVC |
ATC |
AVC |
MC |
0 |
80 |
|||||
1 |
40 |
|||||
2 |
70 |
|||||
3 |
40 |
|||||
4 |
100 |
a) Suppose the firm is a price–taker and the price is $60 per unit.
i) What quantity will it produce (find the profit-maximizing level of output)?
ii) Calculate the profit/loss.
b) What is the shut-down price?
1.
Q | TC | TFC | TVC | ATC | AVC | MC |
0 | 80 | 80 | 0 | --- | --- | --- |
1 | 120 | 80 | 40 | 120 | 40 | 40 |
2 | 140 | 80 | 60 | 70 | 30 | 20 |
3 | 200 | 80 | 120 | 66.67 | 40 | 60 |
4 | 300 | 80 | 220 | 75 | 55 | 100 |
A.
i.
Price = $60
Profit maximizing quantity is produced where, P = MR = MC. In this case, it is $60 and firm will produce 3 units.
At 3 units of output, price will be equal to the MC.
ii.
Profit = 60*3 - 200
Profit = -$20
So, there is a loss of $20.
B.
Shut down price is when Price is less than the AVC. So, shut down price is $30. If price goes below $30, then firm will shut down.