(TCO C) Answer the next questions (Parts A and B) on the basis of the following
ID: 1173328 • Letter: #
Question
(TCO C) Answer the next questions (Parts A and B) on the basis of the following cost data for a firm operating in pure competition:
OUTPUT ------ TFC -------- TVC
0 $50.00 0.00
1 50.00 90.00
2 50.00 160.00
3 50.00 200.00
4 50.00 260.00
5 50.00 340.00
6 50.00 450.00
(a.) (15 points) Refer to the above data. If the product price is $55, at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.
(b.) (15 points) Refer to the above data. If the product price is $70, at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations. (Points : 30)
Explanation / Answer
a) Price elasticity at $8 = ((200-360)/200)/((8-6)/8) = -3.2
Price elasticity at $6 = ((360-600)/360)/((6-4)/4) = -1.33
So it is elastic in this range.
b) Total Revenue @ 600 unit = $4*600 = $2400
Total Revenue @ 1000 unit = $2*1000 = $2000
Marginal Revenue = $400 for 400 units = $1 per unit
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