Question

G. What is the profit-maximizing level of output?What is the maximum level of profits that the farm can earn? H. What is the breakeven price? What is the break even quantity? 1. What is the shutdown price? What is the shutdown quantity? J. What happens to fixed costs in the long run? What are the breakeven and shutdown points in the long run? K. Graph TC, TVC, TFC, ATC, AVC, and MC. Include labels and units.

Answer 1

Answer :

G.Total profit is maximized where marginal revenue equals marginal cost. In this example, maximum profit occurs at 5 units of output. A perfectly competitive firm will also find its profit-maximizing level of output where MR = MC

At Y= 5, MR = MC = 14

Therefore, profit maximizing level of output = 5 units

Maximum level of profits = TR - TC = 70 - 46 = 24

H.

The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero.

The break even point is the point where the marginal cost (MC) equals the average total cost (ATC)

Based on the data given in the table above, and assuming that fractional units can not be produced and sold

Break even point(quantity) = 5 units

Break even price = 14

Chart Title 30 25 20 15 10 5 0 1 2 3 4 5 6 7 Quantity 0 MCO ATCO AVCO MR

I .

Shut down point = 5 units

Shut down price = 14

Please see the figure above for understading breakeven and shut down points.

The shut-down point of production is the price at which the the marginal cost does not even cover the average variable cost (AVC)

The shut down price are the conditions and price where a firm will decide to stop producing.

It occurs where AR <AVC

• The shut down price is said to occur, where price (average revenue AR) is less than average variable costs (AVC).
• At this price (AR<AVC), the firm is making an operating loss. The total revenue is less than operating (variable) costs.
• A firm can keep producing, even if AR < ATC (average total costs) because they are making a contribution towards fixed costs which have been paid anyway.

Part J :

The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero. In long run, all costs are variable and therefore, the point where firm is able to recover all cost incurred will be the break even point.

A decision to shut down means that the firm is temporarily suspending production. It does not mean that the firm is going out of business (exiting the industry). If market conditions improve, due to prices increasing or production costs falling, the firm can resume production. Shutting down is a short-run decision. A firm that has shut down is not producing, but it still retains its capital assets; however, the firm cannot leave the industry or avoid its fixed costs in the short run.

However, a firm will not choose to incur losses indefinitely. In the long run, the firm will have to decide whether to continue in business or to leave the industry and pursue profits elsewhere. Exit is a long-term decision. A firm that has exited an industry has avoided all commitments and freed all capital for use in more profitable enterprises. A firm that exits an industry earns no revenue but it incurs no costs, fixed or variable.

The long-run decision is based on the relationship of the price P and long-run average costs LRAC. If P ≥ LRAC then the firm will not exit the industry. If P < LRAC, then the firm will exit the industry. These comparisons will be made after the firm has made the necessary and feasible long-term adjustments.

In the long run a firm operates where marginal revenue equals long-run marginal costs, but only if it decides to remain in the industry. Thus a perfectly competitive firm's long-run supply curve is the long-run marginal cost curve above the minimum point of the long-run average cost curve.

Part K :

Chart Title 100 TI 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 Quantity ТС TVC MC ATC AVC TFC