Question

SECTION NAME PRINT LAST NAME, FIRST NAME PERFECT COMPETITION Use the graph for a perfectly competitive firm to answer questions 1 through 10. Price (P) MC 10.00 ATC 8.75 8.00 7.75 7.50 AVC 250 300 440 500 Quantity If price - $10, the profit-maximizing/loss-minimizing level of output is (1) total revenue is equal to (2) $_ -, total cost is equal to (3) $_ and the firm earns economic profit equal to (4) $_ If price = $7.50, the profit-maximizing/loss-minimizing level of output is (5) total revenue is equal to (6) $_ _, total cost is equal to (7) $ and the firm earns economic profit equal to (8) $_ If price $5.50, the firm can either shut down immediately and pay fixed costs equal to (9) $ or the firm can produce at output level 300 and incur economic losses equal to (10) $_ 237 Chapter 11 Assignments

Answer 1

Under perfect competition, the profit maximizing principle is that set price = marginal cost. The total revenue is calculated by mutiplying price X quantity. The total cost is equal to cost corresponding to ATC (average total cost curve) at the concerned level of quantity. If total revenue- total cost yields a positive value, the firm is earning a profit. If total revenue- total cost yields a negative value, the firm is incurring losses. MC represents marginal cost, that is, the increase in cost by producing one more unit of output. ATC represents average total cost, that is, total cost/ quantity. AVC represents average variable cost, that is, cost pertaining to variable inputs only. The vertical difference between AVC and ATC is the level of fixed costs incurred.

At price= $10, the profit maximizing level of output is 500 (where price= MC), total revenue = $5000 ($10 X 500 units), total cost=$3875 [(ATC corresponding to 500 level of quantity) $7.75 X 500 units] and the firm earns economic profit equal to $1125.

At price= $7.50, the profit maximizing level of output is 440 (where price= MC), total revenue = $3300 ($7.50 X 440 units), total cost=$3300 [(ATC corresponding to 440 level of quantity) $7.50 X 440 units] and the firm earns economic profit equal to $0. The firm earns zero economic profits since the P=MC=ATC, that is, revenue and cost are equal to each other.

At price= $5.50, the firm can either shut down immediately and pay fixed costs equal to $750 or the firm can produce at level 300 and incur economic losses equal to $750.

The fixed costs as mentioned are vertical difference between ATC and AVC. Thus at output=300, the fixed costs are $8 (ATC) - $5.50 (AVC)= $2.50 per unit of output. Total fixed cost = $2.50 X 300= $750.

At output = 300 (where price= MC), total revenue = $1650 ($5.50 X 300 units), total cost=$2400[(ATC corresponding to 300 level of quantity) $8 X 300 units] and the firm earns economic loss of $750.