Suppose that a purely competitive firm has the production costs reported in the
ID: 1176500 • Letter: S
Question
Suppose that a purely competitive firm has the production costs reported in the table below. Fill out the rest of the table and answer the following questions regarding the output produced, profits, and losses in the short-run.
Output
TVC
TC
AFC
AVC
ATC
MC
0
0
100
-
-
-
-
1
100
2
180
3
240
4
320
5
440
6
600
7
800
8
1040
Suppose that the competitive market price is $165. How many units of output should the individual competitive firm produce to maximize profits (or minimize losses) in the short-run? Explain carefully the economic rationale behind this figure. In this first state of the world, the unit profit (or loss) equals ____, and the total profit (or loss) equals ____. Show the math.
Suppose that the competitive market price falls $90. How many units of output should the individual competitive firm produce to maximize profits (or minimize losses) in the short-run? Explain carefully the economic rationale behind this figure. In this second state of the world, the unit profit (or loss) equals ____, and the total profit (or loss) equals ____. Show the math.
Suppose that the competitive market price falls further to $75. How many units of output should the individual competitive firm produce to maximize profits (or minimize losses) in the short-run? Explain carefully the economic rationale behind this figure. In this third state of the world, the total profit (or loss) equals ____.
Output
TVC
TC
AFC
AVC
ATC
MC
0
0
100
-
-
-
-
1
100
2
180
3
240
4
320
5
440
6
600
7
800
8
1040
Explanation / Answer
Output
TVC
TC
AFC
AVC
ATC
MC
0
0
100
-
-
-
-
1
100
200
100
100
200
100
2
180
280
50
90
140
80
3
240
340
33.33
80
113.33
60
4
320
420
25
80
105
80
5
440
540
20
88
108
120
6
600
700
16.66
100
116.66
160
7
800
900
14.28
114.28
128.56
200
8
1040
1140
AFC=12.5
AVC=130
ATC=152.5
MC=240
let the units produced=Q
then revenue of the firm=165*Q
the firm's objective is to maximise profit.
hence it will maximise profi which is equal to 165Q-ATC(Q)
henc it will maximise output where MR=MC
hence P=MC gives us the point where profit is maximum.
we can see that for Q=6 MC=160
therefore Quantity produced should be equal to 6 to get maximum profits.
this is the figure where the company can operate at maximum profit and this is the figure where the wokers or the labors are paid according to their Marginal Productivity.
hence the unit profit equals= 165*6-700/6=290/6=48.33
and total profit equals 290
if price falls to 90 then according to P=MC
the Quantity produced should be either 2 or 4
but we'll find out the profits at those points
For Q=2 ; profit=-100
for Q=4 ; profit= -60
hence at price=90 the quantity produced should be Q=4 to minimise losses.
total profit=90*4-TC(4)=360-420=-60
unit profit=total profit/quantity=-60/4=-15
if price further falls to 75 then according to profit maximisation
MC=80 is the profit maximising point
therefore Q=2 or 4 is again probable.
now we have to find profits at these quantities
for Q=2 the profit=-130
for Q=4 the profit=-120
hence again Q=4 is the profit maximising quantity
the Profit= 75*4-420=-120
unit profit= -120/4=-30
for futher queries please contact.
Output
TVC
TC
AFC
AVC
ATC
MC
0
0
100
-
-
-
-
1
100
200
100
100
200
100
2
180
280
50
90
140
80
3
240
340
33.33
80
113.33
60
4
320
420
25
80
105
80
5
440
540
20
88
108
120
6
600
700
16.66
100
116.66
160
7
800
900
14.28
114.28
128.56
200
8
1040
1140
AFC=12.5
AVC=130
ATC=152.5
MC=240
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