7. (10 points) Assume the following cost data are for a perfectly competitive fi

Question

7. (10 points) Assume the following cost data are for a perfectly competitive firm. Total Fixed ble Total Average Average Average Marginal Cost FixedVariable Total Cost Product Cost CostCost Cost Cost 0 S100 SO$100 S100S44 $144 $100.00$43.74 $143.74$43.74 2 $100 S84 $184 $50.00 $41.92$91.92 $40.10 S100 $120 $220 $33.33$40.10 $73.43$36.45 4 $100 $153$253 $25.00 $38.27$63.27 $32.81 5 $100 $190 $290 $20.00 $37.9$57.9$36.45 6 $100 $230 $330 $16.67 $38.27 $54.94 $40.10 7 $100 $273 $373 $14.29 $39.05 $53.34 $43.74 8 $100 $324 $424 $12.50 $40.55$53.05 $51.03 9$100 $383 $483 $1$42.53 $53.64 $58.32 10 $100 $448 $548 $10.00 $44.83 $54.83 $65.61 a. At a product price of S35, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize? b. Answer the same questions assuming product price is $45. c. Answer the same questions assuming product price is $55

Explanation / Answer

Answer
a)
The firm will shut down in short run because the price is below average variable cost to minimize losses.
Loss=FC=$100
b)
The price is above $45 so the firm will produce at MC=P or the closest lower MC where the Q=7 units
Profit=TR-TC=P*Q-373=45*7-373=-58
the loss is $58
c)
The price is above average variable cost so the firm will produce
Q=8 units
Profit=(55*8)-424=16
the profit is $16

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