a. If price is $3 per unit of output, the manager should produce _____________ u

ID: 1203960 • Letter: A

Question

a. If price is $3 per unit of output, the manager should produce _____________ units.

b. Since average total cost is $________ for this output, total cost is $___________.

c. The firm makes a profit of $_____________.

d. Let price fall to $1, the manager should now produce ________ units.

e. At a price of $1, total revenue is $____ and total cost is $____. The firm makes a loss of $___.

f. At a price of $1, total variable cost is $_____, leaving $____in revenue to apply to fixed cost.

g. If price falls below $_____________, the firm will produce zero output.

(a) A perfectly competitive firm maximizes profit equating Price with MC. So, when P = 3, MC = 3 and Q = 4,000

(b) When Q = 4,000, ATC = $2

Total cost = ATC x Q = $2 x 4,000 = $8,000

(d) At P = MC = $1, Q = 2,000

(e) When Q = 2,000, ATC = $1.5

Total revenue = P x Q = $1 x 2,000 = $2,000

Total cost = $1.5 x 2,000 = $3,000

Loss = TC - TR = $(3,000 - 2,000) = $1,000

(f) When Q = 2,000, AVC = $0.4

TVC = AVC x Q = $0.4 x 2,000 = $800

This leaves $(3,000 - 800) = $2,400 for fixed cost.

(g) If price is less than $0.4 (lowest point of AVC), it will shut down & produce zero output.

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