In: Economics
A competitive firm’s cost of producing q units of output is C = 18 + 4q + q2. Its corresponding marginal cost is MC = 2q + 4. a. The firm faces a market price p = $24. Create a spreadsheet with q = 0, 1, 2, . . ., 15, where the columns are q, R, C, VC, AVC, MC, and profit. Determine the profit-maximizing output for the firm and the corresponding profit. Should the firm produce this level of output or should it shut down? Explain. b. Suppose the competitive price declines to p = $12. Repeat the calculations of part a. Should the firm shut down? Please show Excel Formulas. Thanks!
Revenue can be calculated by multiplying Price with Quantity
R = PQ
C = 18 + 4q + q2
C = FC + VC
FC = 18
VC = C - FC
MC = 2q + 4
Yes the firm should produce as price is greater than the AVC.
Now, when price = $ 12
The firm should continue to produce in the short run as AVC is less than the price.