Question

MC Cost and Revenue ATC MR AVC o '1'2'3'4'56'58' Quantity 10 a. (1 points) Using the graph above, what is the profit maximizing or loss minimizing output and price? b. (1 point)Using the graph above, what is the profit or loss at the profit maximizing or loss minimizing point c. (1 point) What is the shutdown price and quantity?

Answer 1

The required graph would be as below.

мC 12 11- 10- ATC IA MR AVC в 1- 1 2 3 4 5 6 Quantity 7 8 9 10 Cost and Revenue

(a) The profit maximizing output would be 7 units. The profit is maximized where the MC is equal to MR=P, at the rising MC, which is at where Q=7. Since at this quantity level, P=MR exceeds AC, the firm would be at profit.

(b) The amount of profit would be $\pi = (P - ATC)Q$ or $\pi = (4 - 3)*7$ or $\pi = \underline{7}$ . The price (=MR) is 4. The profit per unit would be the AB, as A is the price and B is the average cost at Q=7, and profit would be the difference between A and B. The total profit would be AB times output, which is at point D (7 units).

(c) The shut down price would be 2.5. The shut down price is at the minimum of AVC, below which the firm can not cover its variable cost, and must shut down in the short run. At the minimum of AVC, MC intersects AVC, which is at where cost is at point D. Hence, 2.5 is the shut down price.