Question

The following table represents short run cost-revenue information (in dollars) for a firm in a competitive market.

Q	P	TR	MR	MC	TC	Total Profit
0		0	N/A	N/A	1000
1		200			1200
2		400			1340
3		600		60
4		800			1420
5		1000			1440
6		1200		60
7		1400		80	1580
8		1600		140
9		1800
10		2000

(a) Fill in all the blanks above using the following information: The Market Price is $200 per unit of output, the VC of producing 9 units of output is $920, and the ATC of producing 10 units of output is $220

(b) Where does diminishing returns start? Explain your answer.

(c) What is the Fixed Costs for this firm? Explain your answer.

(d) In the Short Run, if this firm would go into production, determine the profit maximizing (or loss minimizing) level of output and profit amount.

(e) In the Short Run, if this firm would instead shutdown without going into production, determine its production amount and profit amount.

(f) Please determine the best course of action for this firm in the Short Run. Please explain your reasoning.

(g) Based on the data above, in the Long Run, explain what this firm should do and why the firm should pick this course of action.

Answer 1

Q	P	TR	MR	MC	TC	PROFIT	ATC	VC	AVC
0	200	0	N/A	N/A	1000	-1000	#DIV/0!	0
1	200	200	200	200	1200	-1000	1200	200	200
2	200	400	200	140	1340	-940	670	340	170
3	200	600	200	60	1400	-800	466.6667	400	133.3333
4	200	800	200	20	1420	-620	355	420	105
5	200	1000	200	20	1440	-440	288	440	88
6	200	1200	200	60	1500	-300	250	500	83.33333
7	200	1400	200	80	1580	-180	225.7143	580	82.85714
8	200	1600	200	140	1720	-120	215	720	90
9	200	1800	200	200	1920	-120	213.3333	920	102.2222
10	200	2000	200	280	2200	-200	220	1200	120

TR=P*Qa) P=200

MR=change in TR/change in Q

MC=change in TC/change in Q

TC=FC+VC

FC=1000

PROFIT = TR-TC

b) Diminishing returns sets in when the firm produces Q=6 units as the Marginal cost per output starts increasing.

c) Fixed costs for this firm is 1000 as when the firm produces 0 output,it still incurs total cost equal to its fixed cost and as we can see from the table that when Q=0,TC=1000 so FC=1000 constant.

d) In the short run,the firm will set its P=MC to find the profit maximizing or the loss minimizing output level

so setting P=MC,the loss minimizing output is Q=9 units

e) if it shuts down then it will produce 0 units and incur total loss equal to its fixed cost of 1000 therefore profits = -1000.

f) In the short run this firm should produce because the price is greater than its minimum AVC which means that this firm is able to recover its variable cost and instead of shutting down, it should continue to produce to minimize its losses as by producing its making loss of only -120 whereas by shutting down, it will make loss of -1000.

g) In the long run,the firm should exit the market as it is unable to recover its total cost and the price is less than its minimum ATC which means that it will be unable to recover its total cost and continue to make losses so it should exit the market in the long run to avoid making losses.