1. The figure given below shows the revenue and cost curves of a perfectly compe
ID: 1160327 • Letter: 1
Question
1. The figure given below shows the revenue and cost curves of a perfectly competitive firm. MC: Marginal cost curve MR: Marginal revenue curve ATC: Average-total-cost curve AVC: Average-variable-cost curve Price Figure 1 MC ATC 35 30 20 10 20 Quantily 15 la. Refer to Figure 1. What is the firm's total fixed cost at the profit-maximizing output level? lb. Refer to Figure 1. Compute the profit earned by the firm at the profit-maximizing level of output. Ic. Refer to Figure 1. Compute the profit earned by the firm if the marginal-revenue curve would have intersected the average-total-cost curve at the latter's lowest point and the firm maximized profit. Id. Refer to Figure 1. If the market price falls to $10, what is the profit-maximizing output level?Explanation / Answer
1 a. The Profit maximizing ouput level is at 20 units.
** Assume that firm is maximizing its profit so it will produce at the highest quantity where MR = MC = P**
At this point we have to find Total fixed cost so total fixed cost = AFC *Q
AFC = ATC - AVC
so at Q = 20 the ATC = $35 and AVC = $20 so AFC = $15 (35 - 20)
Total Fixed cost = AFC * Q = 15*20 = $300
Total Fixed Cost = $300.
1. b Profit earned at this level of output TR - TC
TR (total revenue) = P*Q
P = 50 and Q = 20
so TR = 50* 20 = $1,000
TC (total cost) = ATC * Q = 35*20 = $700
So profit at profit maximizing output is $1,000 - $700 = $300
1.c When MR curve intersect the Average total cost curve at the latte's lowest point and the firm maximized profit.
The quantity is 15 and price = $30 and the profit at this point is $0.
TR = P*Q = 30*15 = $450
TC = ATC *Q = 30 * 15 = $450
profit = TR - TC = $450 - $450 = $0.
1.d. If P = $10, the prfit maximizing output level is 10 units.
As shown in the diagram, the MC = MR = P at q = 10 when P falls to $10.
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