Question

The following problem applies to a perfectly competitive producer of widgets. A typical producer, say Widget Enterprises Inc., can sell widgets at a constant price of $30/pound. Widget Enterprises has the following costs in the short-run. Its total fixed costs are $45.

QUANTITY (LBS)	TOTAL COST $
0	45
1	65
2	80
3	90
4	105
5	125
6	150
7	180
8	215
9	255

a. What does it mean to say that Widget Enterprises is a price taker? What does it say about the widgets it makes and the widgets of other firms?

b. Complete the following schedule:

Q (lbs)	TC $	TFC $	TVC $	MC $	TR $	MR $
0	45
1	65
2	80
3	90
4	105
5	125
6	150
7	180
8	215
9	255

c. Profit is maximized where MR = MC. What is the profit maximizing quantity of widgets?

d. For the answer you gave in part c, compute the profit earned by the firm.

e. Complete the following schedule:

Q lbs	AFC $/lb	AVC $/lb	ATC $/lb
0
1
2
3
4
5
6
7
8
9

f. On a single graph, plot MR, MC, AVC, and ATC.

g. What would the profit maximizing quantity of output be if the price of widgets were $35/lb? What if the price were $40/lb?

h. What does the short-run supply curve for the firm look like?

Answer 1

a. Price taker means it needs to accept the price determined by the market and do not have the power to influence price. It means the market is in perfect competition and other firms too are price takers

b.

Q (lbs)	TC $	TFC $	TVC $	MC $	TR $	MR $
0	45	45	0
1	65	45	20	20	30
2	80	45	35	15	60	30
3	90	45	45	10	90	30
4	105	45	60	15	120	30
5	125	45	80	20	150	30
6	150	45	105	25	180	30
7	180	45	135	30	210	30
8	215	45	170	35	240	30
9	255	45	210	40	270	30

c. Profit is maximised at Q= 7 lbs

d. Profit = TR-TC = 7*30-215=$0

e.

Q lbs	AFC $/lb	AVC $/lb	ATC $/lb
0
1	45.00	20.00	65.00
2	22.50	17.50	40.00
3	15.00	15.00	30.00
4	11.25	15.00	26.25
5	9.00	16.00	25.00
6	7.50	17.50	25.00
7	6.43	19.29	25.71
8	5.63	21.25	26.88
9	5.00	23.33	28.33

f.

g. Profit at P=35, is at Q=8 and at P=40, Q=9, where MC=MR
h. Supply curve is the MC curve above AVC curve

.