Question

2. A perfectly competitive firm (price-taker) has the following schedule of average and marginal costs: Q AFC AVC ATC MC 0 1 300 100 400 100 2 150 225 50 100 70 170 60 80 4 75 73 148 140 60 110 6 50 90 103 140 146 140 180 230 7 8 43 38 119 156 171 190 138 160 290 360 33 30 10 For each of the following market prices, determine the following: The profit maximizing output for the firm The per unit profit or loss The total profit or loss If the firm is incurring a loss, indicate whether it should continue to operate or shutdown a) P-$120 b) P-$140 c) P $300 d) P- $65

Answer 1

When P = $120 Profit is maximized where P = MC. This takes place at Q = 5 Profit per unit = P-ATC = 120-140 = -20 • Total profit or loss = 20 x 5 = -$100 • It should continue operations since P > AVC When P = $140 • Profit is maximized where P = MC. This takes place at Q = 6 • Profit per unit = P-ATC = 140-140 = 0 Total profit or loss = 0 x 6 • It should continue operations since P > AVC When P = $300 • Profit is maximized where P = MC. This takes place at Q = 9 • Profit per unit = P-ATC = 300-171 = 129 • Total profit or loss = 129 x 9 = $1161 • It should continue operations since P > AVC When P = $65 • Profit is maximized where P = MC. This takes place at Q = 3 • Profit per unit = P-ATC = 65-170 = -105 Total profit or loss = -105 x 3 = -$315 It should stop operations since P < AVC