Question

Consider the following hourly demand and cost schedule for a firm facing a fixed price of $ 6.00 per unit. (Tπ, is Total Profit).

Q    P             TR   MR    TFC       TVC          TC         MC           ATC          AVC         Tπ

                                                                                                                                                              

0    $6.00                                                               $2.00            

1                                                           4             

2                                                           6             

3                                                           8             

4                                                          11             

5                                                          15                     

6                                                          20             

7.                                                      26             

8                                                          33          

  9                                                          41          

10                                                       50

11                                                       60

                                                                                                                                      

1. Complete the columns for ATC, AVC, and MC as well as those for (TC), TVC, & TFC.
2. Draw the curves for Demand, MR (Marginal Revenue), ATC, AVC, and MC, all in one diagram. Also draw the Total Revenue (TR), Total Cost (TC), TVC, and TFC in a second diagram right below the first one.
3. Determine, in order to maximize profit, how many units should this firm produce and why?
4. Calculate the total profit at the profit-maximizing level and demonstrate it graphically and geometrically in the diagrams wherever applicable.

Answer 1

THE DETAILED SOLUTION IS AS FOLLOWS-

USING THE FORMULAE

TR= P*Q

MR= DIFFERENCE OF ADDITIONAL UNIT IN TR= TRn - TRn-1

TC= TFC + TVC

WHEN TVC= 0 TFC= TC

MC IS ADDITIONAL UNIT COST = TCn - TCn-1

ATC= TC/Q

AVC=TVC/Q

PROFIT= TR-TC

ALSO AT Q=7 MR= MC AND FROM TABLE WE CAN SEE PROFIT IS MAXIMUM

WE PLOTTED ALL THE POINTS

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