Question

show all steps and formulas

VC A product in a perfectly competitive market is $6. Assume the firm is subject to the following outputs and cost MR= TC MC= ATC Profit/Loss ATR/AQ ATR/AQ 200 250 12.5 -130 399 500 600 700 850 158 1000 191 1200 16 219 1700 7.76 II. Complete the table Plot the demand, MR, ATC and MC curves on a graph. Identify the profit maximizing output and price. Is this firm maximizing profits? Explain Can this profit or loss situation remain in the long run? Explain III. IV.

Answer 1

(Question 1)

(I)

• TR = P x Q = 6Q
• VC = TC - TFC = TC - 200 [since TFC is value of TC when Q = 0]
• ATC = TC/Q
• Profit = TR - TC and Loss = TC - TR

Q	TR	MR	TC	VC	MC	ATC	PROFIT/LOSS
0	0		200	0			-200
20	120	6	250	50	2.5	12.5	-130
38	228	6	399	199	8.28	10.5	-171
56	336	6	500	300	5.61	8.93	-164
73	438	6	600	400	5.88	8.22	-162
104	624	6	700	500	3.23	6.73	-76
133	798	6	850	650	5.17	6.39	-52
158	948	6	1000	800	6	6.33	-52
191	1146	6	1200	1000	6.06	6.28	-54
219	1314	6	1700	1500	17.86	7.76	-386

(II)

This is a loss-minimizing firm since there is loss at every output. In following graph loss is minimized at point A where MR (= Price) intersects MC with output Q0 = 158.

(III)

This is a loss-minimizing firm since there is loss at every output. When Q = 158, Loss is minimum at - 52.

(IV)

In long run, loss will make some firms exit the market which will decrease market supply and increase price, and this will continue until each firm earns zero loss.

NOTE: As HOMEWORKLIB Answering Policy, 1st question is answered.