Question

4. Suppose that a perfectly competitive firm has the following total variable costs (TVC): 5 $88 $106 $128 8 $152 $178 7 3 4 $74 6 Quantity: 0 TVC: $0 1 $20 $58 It also has total fixed costs (TFC) of $50. If the market price is $18 per unit: a. Find the firm's profit-maximizing quantity using the marginal revenue and marginal cost approach (2 points) b. Is the firm earning a positive profit, suffering a loss, or breaking even? (1 point)

Answer 1

a ) Ans: Firm's profit maximizing quantity is 5 units.

Explanation:

The profit maximizing condition is where MR = MC.

In the below table , loss is minimized at the 5 units of output.

Q	FC	VC	TC	Price	TR	MC	MR	Profit
0	50	0	50	18	0	--	---	-50
1	50	20	70	18	18	20	18	-52
2	50	58	108	18	36	38	18	-72
3	50	74	124	18	54	16	18	-70
4	50	88	138	18	72	14	18	-66
5	50	106	156	18	90	18	18	-66
6	50	128	178	18	108	22	18	-70
7	50	152	202	18	126	24	18	-76
8	50	178	228	18	144	26	18	-84

TC = FC + VC

TR = Price * Q

Marginal cost = Change in total cost / Change in Q

Marginal revenue = Change in total revenue / Change in Q

Profit = TR - TC

b ) Ans: The firm is suffering a loss.

Explanation:

It is cleared from the above table , the firm is suffering a loss at each level of output ( from 0 to 8 units).