A firm has marginal costs given by MC=10+Q and average variable costs AVC= 10+Q/2 If fixed...
A firm has marginal costs given by MC=10+Q and average variable costs AVC= 10+Q/2 If fixed costs are $5000 and the market price is $100 find firm's maximum profit. Will the firm continue to operate in the short run? Explain.
Homework Answers
Answer
The firm produces at MC=P if P>AVC
equating MC=P
10+Q=100
Q=90
AVC=10+Q/2=10+90/2=55
P>AVC so the firm operates
TC=Fied cost +AVC*Q=5000+55*90=9950
TR=P*Q=100*90=9000
Profit=TR-TC=9000-9950=-950
the firm makes a loss of $950
=====
The firm continue to operate as if the firm shutdown the loss is equal to fixed cost which is $5000 so the firm operate in the short run to reduce loss to $950.
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