Question

Use the following data to answer the questions below:

             Q                 VC             MC           AVC

              1                 $10              ___            ___                     

              2                16              ___            ___         

              3                20              ___            ___                     

              4                25              ___            ___

              5                31              ___            ___

              6                  38              ___            ___    

              7                  46              ___            ___

8                  55              ___            ___

9                  65              ___            ___         

a. Calculate the marginal cost and average variable cost for each level of production.

b. How much would the firm produce if it could sell its product for $5? For $7? For $10?

c. Explain your answers.

d. Assuming that its fixed cost is $3, calculate the firm’s profit at each of the production levels determined in part (b).

Answer 1

a)

Output (N)	VC	MC	AVC
1	10	-	10.00
2	16	6	8.00
3	20	4	6.67
4	25	5	6.25
5	31	6	6.20
6	38	7	6.33
7	46	8	6.57
8	55	9	6.88
9	65	10	7.22

AVC = MC / N

MC = VC_N - VC _N-1

b) They sale at a level where MR=MC.

For $5, they MC = 5 at output level 4. Thus they would produce 4 units.

For $7, they MC = 7 at output level 6. Thus they would produce 6 units.

For $10, they MC = 10 at output level 9. Thus they would produce 9 units.

c) If firm operates at level when MR < MC, it is producing too much and reducing the output level can raise the profit. If MR > MC, firms can raise their profit level by raising the output. Thus they produce at level where MR = MC.

d)

Output	FC	VC	TC	MC	AVC
1	3	10	13	-	10.00
2	3	16	19	6	8.00
3	3	20	23	4	6.67
4	3	25	28	5	6.25
5	3	31	34	6	6.20
6	3	38	41	7	6.33
7	3	46	49	8	6.57
8	3	55	58	9	6.88
9	3	65	68	10	7.22

At $5, 4 units are produced. At 4 units total revenue is $5 * 4 = $20. Total cost at this level is $28, thus making an loss of $8.

At $7, 6 units are produced. At 6 units total revenue is $7 * 6 = $42. Total cost at this level is $41, thus making an profit of $1.

At $10, 9 units are produced. At 9 units total revenue is $10 * 9 = $90. Total cost at this level is $68, thus making an profit of $22.