Question

1. A firm has the following total costs, where Q is output and TC is total cost:

Q	TC
0	$ 100
1	110
2	130
3	160
4	200
5	250
6	310
7	380
8	460
9	550
10	650
11	760

1. Say the firm is in a perfectly competitive market. If the current market (equilibrium) price is $ 70, at what output level will the firm as a profit maximizer produce at?

2. Say the market price rises to $ 90. At what output level (as a perfect competitor) will this produce at?

3. How much profit is the firm making at a price of $90? Based on this calculation, do you expect firms to enter or leave this market?

4. Say instead this firm is a monopoly. If the firm maximizes profit at an output level where marginal revenue equals $ 60, what output level will this be?

Answer 1

Q	MC = Change in TC
0	-
1	110 - 100 = 10
2	130 - 110 = 20
3	30
4	40
5	50
6	60
7	70
8	80
9	90
10	100
11	110

a) P = 70 = MC at Q = 7. So, perfectly competitive profit maximizer produces 7 units because it maximizes profit at the point where P = MC.

b) P = 90 = MC at Q = 9. So, perfectly competitive profit maximizer produces 9 units because it maximizes profit at the point where P = MC.

c) Profit = Total Revenue - TC = P*Q - TC = (90*9) - 550 = 810 - 550 = 260. As economic profit is positive, so firms will enter this market.

d) Monopolist maximizes profit where MR = MC. MR = MC = 60 at 6 units. So, monopolist will produce 6 units.