Answer the next five questions on the basis of the following diagram: 24. In ord

Question

Answer the next five questions on the basis of the following diagram: 24. In order to maximize profits or minimize losses this firm will produce: a. OK units at price OC. b. OD units at price DJ. c. OE units at price OA. d. OE units at price OB. 25. At price OA, total revenue will be: a. OAHE b. OBGE c. OCFE d. ABGH 26. At price OA, total fixed cost is equal to: a. OAHE b. BCFG c. OCFE d. OBGE 27. At price OA, total variable cost is equal to: a. OAHE b. OCFE c. OBGW d. ABGH 28. At price OA, the firm will realize: a. a loss equal to BCFG. b. a loss equal to ACFH. c. an economic profit of ACFH. d. an economic profit of ABGH.

Explanation / Answer

24(c) Here MR = Price = demand. This is a case of perfect competition where profit is maximised when P = MR = MC. This is sufficient when MC is rising from below. This condition is satisfied at point H with price = OA and quantity = OE

25(a) Total revenue = price x quantity

At price OA, equilibrium quantity is OE. Hence revenue = OAHE

26(b) At price OA, equilibrium quantity is OE.

At OE quantity, TC is OBGE and VC is OCFE. The difference between the two is fixed cost, which is BGFC

27(b) Please see explanation for 26(b)

28(d) At price OA, the equlibrium quantity is OE. At this quantity, the MR is HE while ATC is GE. The level of profit is thus the difference between revenue and cost which is HG. Multiplying this with OE, we get the area ABGH.

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