Question

1. Assume the following cost data for XYZ industries, a firm that participates in a perfectly competitive market.  Use this data to answer the following questions.

Output	Average Fixed Cost	Average Variable Cost	Average Total Cost	Total Cost	Marginal Cost
0	-	-	-
1	60	45	105
2	30	42.50	72.50
3	20	40	60
4	15	37.50	52.50
5	12	37.00	49
6	10	37.50	47.50
7	8.57	38.57	47.14
8	7.50	40.63	48.13
9	6.67	43.33	50
10	6.00	46.50	52.20

1. Fill in the Total Cost and Marginal Cost data above.

2. If price is $56 then what level of output would maximize profit?  What would profit be?

3. If price is $41 then what level of output would maximize profit?  What would profit be?

4. If price is $32 then what level of output would maximize profit?  What would profit be?

5. Fill in the following information, and assume XYZ industries is the typical firm in the market:

Answer 1

1)

Output	Average Fixed Cost	Average Variable Cost	Average Total Cost	Total Cost (ATC*Output)	Marginal Cost (TCn - TCn-1)
0	-	-	-	-	-
1	60	45	105	105	105
2	30	42.50	72.50	145	40
3	20	40	60	180	35
4	15	37.50	52.50	210	30
5	12	37.00	49	245	35
6	10	37.50	47.50	285	40
7	8.57	38.57	47.14	329.98	44.98
8	7.50	40.63	48.13	385.04	55.06
9	6.67	43.33	50	450	64.96
10	6.00	46.50	52.20	525	75

2) A perfectly competitive firm maximizes output where price = marginal cost and after that output marginal cost should be rising.

If price is $56 , then from above table it can be seen that the marginal cost that is most close to the price of $56 is $55.06. The output corresponding to the marginal cost of $55.06 is 8 units. Thus firm will maximize its output at 8 units of output if price is $56.

Now,

Profit = Total revenue at 8 units of output - Total cost at 8 units of output

= price * output - 385.04 = 56*8 - 385.04

= 448-385.04

=$62.96

3)

If price is $41 , then from above table it can be seen that the marginal cost that is most close to the price of $41 is $40. The output corresponding to the marginal cost of $40 is 6 units. Thus firm will maximize its output at 6 units of output if price is $41.

Now,

Profit = Total revenue at 6 units of output - Total cost at 6 units of output

= price * output - 285 = 41*6 - 285

= 246-285

=-$39

Here, firm is incurring a loss of $39. Even if there is a loss firm will continue to operate in the market as price ($41) > average variable cost (37.50$)

4)

If price is $32 , then from above table it can be seen that the marginal cost that is most close to the price of $32 is $30. The output corresponding to the marginal cost of $30 is 4 units. Thus firm will maximize its output at 4 units of output if price is $32.

Now,

Profit = Total revenue at 4 units of output - Total cost at 4 units of output

= price * output - 210

= 32 * 4 - 210

= -82

Here, firm is incurring a loss of $82. The firm at this price will shut down its operations as price ($32) < average variable cost ($37.50)