Question

FOR BOTH QUESTIONS PLEASE USE THE FOLLOWING TABLE. This data pertains to a pure competition firm where the market price is $30 per unit.

Q	TR	TC	Profit or Loss (calculate)	FC	VC	AFC	AVC	ATC	MR	MC
0		100
1		150
2		178
3		198
4		212
5		230
6		250
7		272
8		310
9		355
10		410
11		475

QUESTION ONE. PLEASE ANSWER THE FOLLOWING QUESTION. [FOR FULL CREDIT YOU MUST SHOW ALL COMPUTATIONS].

QUESTION TWO. PLEASE ANSWER THE FOLLOWING QUESTION. [FOR FULL CREDIT YOU MUST FULLY AND CLEARLY EXPLAIN YOUR ANSWER].

Answer 1

In our case, the firm is incurring only losses. Note that TR < TC at all levels of output. In the short-run, the firm continues to operate as long as the revenue allows the coverage of variable costs (VCs) to a considerable extent. Note the alignment of the VC curve with the TR curve.

If the firm shuts down in the short-run, the firm will not be able to cover fixed costs as no revenue will be earned; variable costs will be zero in case the firm is shut down as VCs vary with the level of output. So, the firm will attempt to minimise losses in the short-run by earning revenue less than the total cost, just enough to enable the firm cover the fixed costs. Fixed costs like rent and tax on property cannot be avoided and will be incurred no matter what. Variable costs can be minimised such as the number of labor, fertilizers, seeds (agricultural good).

In the table, the magnitude of loss is least at $ 62 when the firm is selling 7 units. So, choosing this level of output might enable the firm minimise losses in the short-run.