PROBLEM #3 A small company manufactures a product in a perfectly competitive ind

Question

PROBLEM #3 A small company manufactures a product in a perfectly competitive industry. The table below indicates the company's total fixed and total variable costs (TFC and TVC) in the short run. Compute the total cost (TC), marginal cost (MC), and average total cost (ATC) for the company at each level of output (complete the table). Quantity () TFC TVC TC MC ATC 400 400 400 400 400 1,800 2,700 3,100 3,800 5,900 4 a. Briefly explain why the company's total cost is positive, even if the company decides not to produce any output. b. Find the level of output at which diminishing marginal returns set in. c. Suppose the current market price for this product is $2,000. Find the quantity that this company will choose to produce and sell if the goal is to maximize profits. You may use any valid method for finding the profit-maximizing level of output

Explanation / Answer

a) Total cost = TFC + TVC. Since, the firm incurs fixed cost of $400 even if there is 0 output, thats why total cost is positive.

b) At 2 units of output diminishing marginal return set in.

c) The company will choose to produce 4 units of output to maximize profit.

Q TFC($) TVC($) TC($) = TFC+TVC MC($) ATC($) = TC/Q TR($) = $2000*Q MR($) Profit($) = TR - TC 0 400 0 400 0 -400 1 400 1800 2200 1800 2200 2000 2000 -200 2 400 2700 3100 900 1550 4000 2000 900 3 400 3100 3500 400 1166.67 6000 2000 2500 4 400 3800 4200 700 1050 8000 2000 3800 5 400 5900 6300 2100 1260 10000 2000 3700

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