Question

(43) Assume a single firm in a purely competitive industry has short-run production costs as indicated in the following table. Answer questions a through c using the data from this table. TVC-Total variable Costs. TC=Total Costs: AFC=Average Fixed Costs; AVC=Average Variable Costs; ATC-Average Total Costs; MC-Marginal Costs Total Output Total Variable Cost $ TVC TC 0 $5.00 $8.00 $10.00 $11.00 $13.00 $16.00 $20.00 Total Cost $ Average Average Average Total Cost Cost $ MC Marginal Fixed CosVariable $ AFC Cost $AVC $ATC 0 2 4 $10.00 $15.00 $18.00 $20.00 $21.00 $23.00 $26.00 $30.00 $10.00 $5.00 $3.33 $2.50 $2.00 $1.67 $1.43 $5.00 $4.00 $3.33 $2.75 $2.60 $2.67 $2.86 $15.00 $9.00 $6.67 $5.25 $4.60 $4.33 $4.28 $5.00 $3.00 $2.00 $1.00 $2.00 $3.00 $4.00 7 (a) At a product price of $2.50, this firm will not produce in the short run. Explain the test we use to determine whether we produce or not produce Since we are not producing what will be the firm's total profit or loss? Identify what kind of cost the profit or loss will represent (b) At a product price of $2.80, will this firm produce in the short run? Circle Yes orNo If it does produce, what will be the profit-maximizing or loss-minimizing output? Number of units What economic profit or loss will the firm realize per unit of output? Show calculation of per unit profit. What is the firm's total profit or loss? Show calculation of total profit. (Units) X (Profit per unit) (c) At a product price of $4.30, will this firm produce in the short run? Yes or No? If it does produce, what will be the profit-maximizing or loss-minimizing output? Number of units What economic profit or loss will the firm realize per unit of output? Show calculation of per unit profit. What is the firm's total profit or loss? Show calculation of total profit. (Units) X (Profit per unit)

Answer 1

(a) The test used is comparison of price (P) with minimum of AVC. As P = $2.50 and minimum of AVC = $2.60 so P < minimum of AVC. Thus, firm will not produce in the short run. So, Q = 0

Total profit/Loss = Total Revenue - Total Cost = P*Q - (TC) = (2.50)*0 - 10 = -10
(As TC = $10 at Q = 0)

It represents the total fixed cost of production.
(Though the firm is not producing but it still has to incur the fixed cost in the short run.)

(b) Yes
(As P > minimum of AVC so firm will produce)

Number of units (Q) = 5
(It produces upto the point where P just exceeds or equals MC.)

Per unit profit = Price - ATC = 2.80 - 4.60 = -$1.80

Total profit = 5*(-1.80) = -$9

(c) Yes
(As P > minimum of AVC so firm will produce)

Number of units (Q) = 7
(It produces upto the point where P just exceeds or equals MC.)

Per unit profit = Price - ATC = 4.30 - 4.28 = $0.02

Total profit = 7*(0.02) = $0.14