The graph below summarizes the demand and costs for a firm that operates in a pe
ID: 1093445 • Letter: T
Question
The graph below summarizes the demand and costs for a firm that operates in a perfectly competitive market.
Instruction: Use the nearest whole numbers on the graph when calculating numerical responses below.
a. What level of output should this firm produce in the short run?
number of units:
b. What price should this firm charge in the short run?
$
c. What is the firm?s total cost at this level of output?
$
d. What is the firm?s total variable cost at this level of output?
$
e. What is the firm?s fixed cost at this level of output?
$
f. What is the firm?s profit if it produces this level of output?
Instruction: If the firm is taking a loss, enter this as negative profits.
$
g. What is the firm?s profit if it shuts down?
Instruction: If the firm is taking a loss, enter this as negative profits.
$
h. In the long run, should this firm continue to operate or shut down?
Shut down or Continue to operate
Explanation / Answer
(a) The firm maximizes profit by equating Price (D) with MC. From graph, When P = MC = $28,
Output = 7 units
(b) Price = $28
(c) When Output (Q) = 7, ATC = $32
Total cost (TC) = ATC x Q = $32 x 7 = $224
(d) When Output (Q) = 7, AVC = $14
Total Variable cost (TVC) = AVC x Q = $14 x 7 = $98
(e) When Output (Q) = 7,
Total Fixed cost (TFC) = TC - TVC = $(224 - 98) = $126
(f) Profit = Revenue - TC = (P x Q) - TC = ($28 x 7) - $224 = $(196 - 224) = -$28
(g) If it shuts down, Profit = -TFC = -$126
(h) Since firm is making a loss, firm will shut down in long run.
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