Question

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?

Answer 1

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.