Question

30. Figure 14-2 мC ATC AVC Pa- Pb+ Pe Pd- Refer to Figure 14-2. If the market price is Pa, in the short run the firm will a. Earn zero economic profit. b. Suffer losses and will shut down. c Earn positive economic profit. d. Suffer losses but will remain open. 31. Figure 14-3 19 МС 27 4 16 15 14+ 13- ATC 1 234567 Duantib Refer to Figure 14-3. If the market price is $10, what is the firm's total cost? a. $30 b. $35 c. $15 d. $50 32. Refer to Figure 14-3 from question 31. If the market price is $10, what is the firm's total revenue? a. $30 b. $15 c. $50 d. $35

Answer 1

Answer

30)

The correct answer is (c) Earn positive economic profit.

In order to maximize profit a firm produces that quantity at which MR = MC

where MC = Marginal Cost and MR = Marginal revenue

MR = d(TR)/dQ = d(P*Q)/dQ

Now here P = Price = P_a (Note P_a is constant) and Q = Quantity and TR = Total Revenue = P_a*Q

Thus, MR = d(TR)/dQ = d(P*Q)/dQ = P_a

Thus Profit maximizing condition is P_a = MC

We can see from above graph that Quantity at which P_a = MC at that quantity MC is above ATC and thus P_a = MC > ATC

So, TR = P_a*Q > TC = ATC*Q where TC = Total Cost

Hence TR > TC and thus Profit > 0

Thus, he is earning positive economic profit

Hence, the correct answer is (c) Earn positive economic profit.

31)

The correct answer is (b) $35

In order to maximize profit a firm produces that quantity at which MR = MC

where MC = Marginal Cost and MR = Marginal revenue

MR = d(TR)/dQ = d(P*Q)/dQ

Now here P = Price = 10 and Q = Quantity and TR = Total Revenue = P_a*Q

Thus, MR = d(TR)/dQ = d(10Q)/dQ = 10

We can see from above graph that Quantity at which 10 = MC is Q = 5

We can see from above graph that when Quantity = 5, ATC = 7.

As Total Cost(TC) = ATC*Quantity = 7*5 = 35

Hence, the correct answer is (b) $35

32)

The correct answer is (c) $50.

In order to maximize profit a firm produces that quantity at which MR = MC

where MC = Marginal Cost and MR = Marginal revenue

MR = d(TR)/dQ = d(P*Q)/dQ

Now here P = Price = 10 and Q = Quantity and TR = Total Revenue = P_a*Q

Thus, MR = d(TR)/dQ = d(10Q)/dQ = 10

We can see from above graph that Quantity at which 10 = MC is Q = 5

Total revenue(TR) = Price*Quantity = P*Q = 10*5 = 50

Hence, the correct answer is (c) $50