Question

stion 11 Suppose the a purely competitive firm is producing 100 units of output and that P = $10 and MC = $8 at this level of output. Answer questions #17 - #19 using this information. wered nts out of 5 Flag #17) Is the firm maximizing profits? Explain your answer. Answer: No, profit is - $200 dollars to 12 Lot yet answered #18) Suppose you discover that average fixed costs are $2 and average variable costs are $7. Indicate what the firm should do Points out of 5 RA. BI EE % DU $ * * . . . BEI Flag Question P-10, Q=100, MC=8, FC-2, VC-7, TR-1000, TC#9 P>AVC so it should produce in the short run. (10-9/100=100 Question 13 Not yet #19) Calculate the economic profit (or loss) assuming the cost conditions of AFC = $2 and AVC $7 hold and price stays at $10 and quantity remains at 100 units. (IF your answer is $321, then enter 321 as your answer. IF a loss, enter -321) Points out of 5

Answer 1

Ans) 1) Profit maximising point is where MR and MC are equal. In perfect competition, price = marginal revenue (MR).

Since MR>MC, firm is not profit maximising.

2) If price is above ATC, firms earn positive economic profit. If price is equal to ATC, firms earn zero economic profit.

If price is below ATC then firm will check whether the price is above or below AVC. If price is above AVC, firm will continue the production to minimise loss. But if price is less than AVC, firm will shutdown.

Since here price is more than AVC, firm should continue its production. Further price is above ATC (7+2 = 9) as well and therefore firm is earning positive economic profit.

3) Total revenue = price × quantity = 10×100 = $1000

Total cost = ATC × quantity = ( AFC + AVC) × Q = (7+2) × 100 = $900

Since revenue > cost, firm is earning profit.

Profit = total revenue - total cost = $1000 - $900 = $100