Suppose a perfectly competitive paper firm can produce 10 tons of paper at an output level...

Suppose a perfectly competitive paper firm can produce 10 tons of paper at an output level where marginal revenue is equal to marginal cost. The price per ton of paper is $80 and the average total cost is $95. Suppose the total fixed cost = $100. How much is the profit if the firm shuts down?

Expert Solution

Given information:

Output (Q) = 10 tons

Price (P) = $80 per ton

ATC = $95 per ton.

Fixed cost = $100.

If firm shuts down the production (means output produced is 0 units), then the revenue generated by the firm will be zero, total variable cost will be zero.

Profit = TR - TC

Note: Total cost (TC) = Total variable cost (TVC) + Total Fixed cost (TFC)

Profit = TR - (TVC + TFC)

=> profit = TR - TVC - TFC.

=> Profit = 0 - 0 - 100

=> Profit = -100.

If firm shut down the production, then the profit will be negative 100 (i.e., profit = -100)

Rahul Sunny answered 2 years ago

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