1. Assume a firm under Perfect Competition in the Short Run. Answer each questio
ID: 1118877 • Letter: 1
Question
1. Assume a firm under Perfect Competition in the Short Run. Answer each question in terms of numerical values. MC ATC P, AVC P. P3 10 14 24 30 40 44 4762 6668 O Assume P1 = $20, P2+ $15, P3 = $12, and P4-$6 A. Suppose P1-$20, how much is the profit-maximizing quantity of output? How much are the profit per unit of output and total profit, respectively? (Assume ATC is $16 if output(Q) is 47.) B. Suppose P2-$15, how much are the profit-maximizing output and total profit, respectively? C. Suppose P3-$12, how much are the loss-minimizing output and the loss per unit of output, respectively? How much is total profit? (Assume ATC is $16 if output is 40.) In this case, should the firm produce the output even under the loss? D. Suppose minimum AVC= $8 at which output is 36. What is the firm's supply curve? Draw the supply curve of this firm E. Should the firm produce the output if P4 $6? Why or why not?Explanation / Answer
A) At price P1, firm observes that MC = P1 = 20 when Q is 47. Hence this is the profit maximum quantity. Total profit = (P - ATC)*Q = (20 - 16)*47 = $188. Per unit profit is $4
B) At price P2, firm observes that MC = P2 = 15 when Q is 44. Hence this is the profit maximum quantity. Total profit = (P - ATC)*Q = (15 - 15)*44 = $0. Per unit profit is $0
C) At price P3, firm observes that MC = P3 = 12 when Q is 40. Hence this is the profit maximum quantity. Total profit = (P - ATC)*Q = (12 - 16)*40 = loss of $160. Per unit loss is $4. It should produce because P3 > Minimum of AVC
D) It is the rising portion of MC which starts from minimum of AVC which is 36 units.
E) At P4 = $6, the minimum AVC is more than P4 so this is the case of shut down and it should not produce at this level.
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