Question

please clearly label each part a through d. MC MRP 10 20 20 18 50 20 120 SVC 400 450 500 550 600 650 700 STC 500 550 600 650 700 750 800 SATCSAVC 50 50 27.5 22.5 16.67 16.25 13.75 14 12 12.5 10.83 11.43 10 TR 200 360 480 560 625 675 700 40 50 60 70 50 50 50 0 160 120 80 65 50 25 14 12.5 11.25 10 5 Using the table above, calculate the following: a. How much are fixed costs (2 points)? b. In the short run, what is the firm's optimal production decision? Why does the firm choose this quantity (3 points)? c. At this level of production, does the firm make a profit or a loss? Why? (3 points) d. If SAVC = LAC, what are the returns to scale for this firm? (2 points)

Answer 1

A) The fixed cost is difference between total cost and total variable cost

Fixed cost=500-400=100

B)The short run optimal decision is where, MR=MC =50

So optimla short run output=60.

Because if MR>MC, means additional units gives more revenue than its cost ,so firm should increase production to MAXIMIZE Profit till MR=MC.

If MR<MC ,means additional unita gives less revenue tha. Its cost ,so firm should Decrease Production to MAXIMIZE Profit till MR=MC.

So that is why Profit is MAXIMIZES at MR=MC.

C) Profit=TR-TC=675-750=-75

Firm is making loss of 75.

D) If SAVC=LAC, means long run average cost is exactly same as short run variable cost curve.,

So,

Given short run marginal cost is fixed at 50 which shows additional unit cost constant 50.

So constant marginal cost means, constant return to scale.

So firm has constant return to scale.