Question

suppose a competitive firm has the following cost:

Q 0 1 2 3 4 5 6 7 8 9

TC ($) 50 54 62 74 90 110 134 162 194 230

(Q: output ; TC: total cost)

1 Assume market price is $12 how much should the firm produce to maximize profit?

2 How much profit will it earn at $12?

3 Assume market price is $28, how much should the firm produce to maximize profit?

4 How much profit will it earn at $28?

5 From #1 #4 we can conclude: as price increases, firm produces (less, more) and profit (decreases, increases) circle the correct ones.

Answer 1

1.Ans: 3 units

Explanation:

Under perfect competition , the profit maximization / loss minimization condition is where price equals marginal cost ( P = MC).

The firm should produce 3 units to maximize profit / minimize loss.

2.Ans: Loss of $38

Explanation:

At price $12 , the firm will earn a loss of $38.

Q	TC ( $)	MC ( $)	TR ( $)	Profit/Loss ( $)
0	50	--	0	-50
1	54	4	12	-42
2	62	8	24	-38
3	74	12	36	-38
4	90	16	48	-42
5	110	20	60	-50
6	134	24	72	-62
7	162	28	84	-78
8	194	32	96	-98
9	230	36	108	-122

MC = Change in TC / Change in Q

TR = Price * Q

Profit / Loss = TR - TC

3.Ans: 7 units

Explanation:

At market price $28, the firm should produce 7 units to maximize profit.

Q	TC ( $)	MC ( $)	TR ( $)	Profit/Loss ( $)
0	50	--	0	-50
1	54	4	28	-26
2	62	8	56	-6
3	74	12	84	10
4	90	16	112	22
5	110	20	140	30
6	134	24	168	34
7	162	28	196	34
8	194	32	224	30
9	230	36	252	22

4.Ans: $38

Explanation:

At price $28 , the firm will earn an economic profit of $34.

5.Ans:  From #1 #4 ,We can conclude: as price increases, firm produces more and profit increases.