Question

1. Using the table below, a price of $6 for the output (Py), a cost of $10 per unit of variable input (Px), and a TFC of $200, compute the three total costs (TVC, TFC, TC), the three average costs (AVC, AFC, ATC) and the marginal cost (MC). (28 points) (Please show work for all the questions) TFC TVC TC AFC AVC ATC MC Variable Output Input (bushels) 0 0 10 35 20 75 30 105 40 130 SO 140 What is the profit maximizing output level? What is the maximum profit that can be made with the given prices? To continue production in the long run, the output price must remain equal to or above $ In the short run, production should stop whenever the output price falls below $ 2. Graphically illustrate the importance of break-even price and shut-down price. How the firm manager use these price levels to make output decisions? (6 points)

Answer 1

Question 1

x	Q	TFC	TVC = Px*(x) = 10x	TC = TFC + TVC	AFC = TFC/Q = 200/Q	AVC = TVC/Q	ATC = TC/Q	MC = Change in TC/Change in Q
0	0	200	0	200+0 = 200	-	-	-	-
10	35	200	10*10 = 100	200+100 = 300	200/35 = 5.71	100/35 = 2.86	300/35 = 8.57	(300-200)/(35-0) = 100/35 = 2.86
20	75	200	10*20 = 200	400	2.67	2.67	5.34	2.5
30	105	200	300	500	1.90	2.86	4.76	3.33
40	130	200	400	600	1.54	3.08	4.62	4
50	140	200	500	700	1.43	3.57	5	10

130 units
(Profit maximizing output level is that where P = MR = 6 just exceeds or equals MC. We can see that MR > MC until Q = 130.)

$180
(Profit = TR - TC = Py*Q - 600 = 6*130 - 600 = 780 - 600 = 180)

$4.62
(In long run, P must be greater than or equal to minimum of ATC. Minimum of ATC = $4.62)

$2.67
(When P < minimum of AVC(2.67) then firm stops production in the short run.)

(Note: As HOMEWORKLIB's policy, one question is to be answered at a time.)