Question

B. The following graph shows the cost and revenue curves for a firm in a perfectly competitive market. 90 80 DEMR 70 60 ATC Price and cost (S) 50 AVC 40 - 30 MC 20- 10- 0 10 20 30 40 50 60 70 80 90 a) What is the firm's profit maximizing output? Explain. b) At that output, what is the firm's total revenue? Show your work. c) At that output, what is the firm's total cost? Show your work. d) Compute the firm's profit or loss at that output. Show your work. e) Assume that new firms enter this market and that drives the price down to $35 per unit. Will the firm continue to produce or shut down? Explain your answer. 4. Suppose that the MU that Xavier gets from the 11th take out meal this month is 500 and the price of take out is $10 per meal. Also, suppose that the MU that Xavier gets from the 8th movie this month is 720 and the price of movies is $15. Assume that these are the only 2 goods that Xavier consumes. a) Based on this information, if Xavier has additional income to spend, what should be his next purchase-a movie or take-out? Explain. b) Is your answer the same if instead of $10 per meal, the price of take-out increases to $12 per meal? Explain. c) Can your answer to B explain a typical downward sloping demand curve? Explain.

Answer 1

Sol :

a) Firm's profit maximising level of output is 80 units

As, Profit maximising level of output is the point where following two condition has been satisfied :

• Marginal cost = Marginal Revenue
• MC is higher after equilibrium

b.) At , 80 level of output, firm Total Revenue is

TR = Price x quantity

= 70 × 80

= $5600

c.) At , 80 level of output , Total cost is

TC = ATC x quantity

= 50 X 80

= $4000

d.) Profit / loss = TR - TC

= $5600 - $4000

= $1600

(Note: As per the policy , we have to solve only 4 subparts of the question. So , for remaining question create a separate post.)