a. At a product price of $56, will this firm produce in the short run? If it is

Question

a. At a product price of $56, 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 per unit of output? b. Answer the questions of 4a assuming product price is $41. c. Answer the questions of 4a assuming product price is $32. d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3).

Explanation / Answer

(a) Yes, $56 exceeds AVC (and ATC) at the profit-maximizing output. Using the MR = MC rule it will produce 8 units. Profits per unit = $7.87 (= $56 - $48.13); total profit = $62.96.

(b) Yes, $41 exceeds AVC at the loss—minimizing output. Using the MR = MC rule it will
produce 6 units. Loss per unit or output is $6.50 (= $41 - $47.50). Total loss = $39 (= 6
$6.50), which is less than its total fixed cost of $60.

(c) No, because $32 is always less than AVC. If it did produce according to the MR = MC rule,
its output would be 4—found by expanding output until MR no longer exceeds MC. By
producing 4 units, it would lose $82 [= 4 ($32 - $52.50)]. By not producing, it would lose
only its total fixed cost of $60.

(d) Column (2) data, top to bottom: 0; 0; 5; 6; 7; 8; 9, Column (3) data, top to bottom in dollars:
-60; -60; -55; -39; -8; +63; +144.

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