Question

Homework Assignment # 5 ATC AVC Price МC 20 Demand-AR-MR 10 22 24 18 40 1 (1 points) Using the graph above, what is the profit maximizing or loss minimizing output and price? 2. (1 point)Using the graph above, what is the profit or loss at the profit maximizing or loss minimizing point 3. (1 point) What is the shutdown price and quantity? 4. (1 point) Explain why a firm may continue to produce in the short-run even though the producer is taking a loss. 25

Answer 1

Answer to question 1 is :- As can be seen , the graph above has constant price (AR) , this means that it is a graph of a perfect competition. So profit maximising condition is where Price = Marginal Cost. This occurs at a Price of 20 and output of 22.

Answer to question 2 is :- Profit/Loss = Total revenue - Total cost

At profit maximising condition that is where price = marginal cost , output is 22

So total cost at output 22 = average total cost x output

Total cost at output 22 = 25 x 22 = 550

Similarly , total revenue at output 22 = average revenue x output

Total revenue at output 22 = 20 x 22 = 440

Profit / Loss = Total revenue - total cost

Profit / Loss = 440 - 550

Profit/ Loss = -110

So it is a loss of 110

Answer to question 3 is:- shut down condition is where price is less than average variable costs. A firm should continue to operate if price exceeds average variable cost. The price after which average variable cost exceeds price is at the price of 20 and output of 40.

Answer to question 4 is:- Even when a firm is incurring economic losses in short , this will cause the suppliers to exit the industry due to losses , and this will lead to a fall in the supply thereby shifting the supply to the left causing prices to rise. The prices rise causing economic profits to rise and losses fade away. This will continue as long as there are economic losses and the firm exits till economic losses fades away causing supply to shift to the left and causing prices to rise. This will stop when the market price level goes up to zero economic profit level , where no firm is making super normal profits or losses.