Question

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You are given the following cost and revenue data for Parkin's Pickles, a perfectly competitive firm at its current output level. TR = $1,425 TFC = $380 MC = $12 AFC = $4 AVC = $6 a. Is the firm making a profit or a loss? How much? (Click to select) of $ O b. Is the firm producing the optimal output? If not, should it produce more, less, or none at all? Output: (Click to select) y, it should produce (Click to select)

a) Loss or Profit

b) Yes or No & More, Less, None At All

Answer 1

A) Given that, TFC = $380

we know that, AFC = (TFC/Q)

or, $4 = $380/Q

or, Q = $380/$4 = 95

Given that, TR = $1425

or, P * Q = $1425

or, P = $1425/Q = $1425 / 95 = $15

Therefore, at the current output level, TR = $1425 and TC = TFC + TVC = TFC + (AVC * Q) = $380 + ($6 * 95) = $950

As at the current level of output, TR > TC, therefore the firm is making profit of $(1425 - $950) = $475

B) A profit maximizing perfectly competitive firm produces it's optimal level of output at the point where price = MC. Therefore, for this firm, at optimal output level, price should be $12, which is equal to it's MC. It means the firm's current output level is more than it's optimal level.

Answer: No & Less.