The following table contains information on the marginal revenues and total cost
ID: 1208947 • Letter: T
Question
The following table contains information on the marginal revenues and total costs of an agricultural firm currently operating in a perfectly competitive market. The current price of the product is $7 per unit.
a) What are the firm's fixed costs equal to?
What would be an example of a fixed cost that might be incurred by an agricultural firm?
b) If the price is $7 per unit, what is the optimal, or profit-maximizing, level of production? Explain.
c) Suppose that at a price of $7 per unit, positive economic profits induce firms to enter this market, pushing the price down to $5 per unit. What is the new optimal or profit-maximizing level of production for this firm? Explain.
d) Would the firm stay in this market even if it were now earning zero economic profits at a price of $5 per unit? Why or why not? Explain your answer in 2-3 sentences.
Q MR, P=$7 MR, P=$5 TC MC 0 $ 1.00 1 ______ ______ $ 2.00 ________ 2 ______ ______ $ 4.00 ________ 3 ______ ______ $ 9.00 ________ 4 ______ ______ $ 15.00 ________ 5 ______ ______ $ 22.00 ________Explanation / Answer
Firm's fixed cost is $1 because that is cost incurred at 0 production.
Fertilizers and seeds are the examples of Fixed cost.
b) In perfect competition, quantity is where MR=MC. MC = 7 at Quantity of 5 units. (TC5 - TC4 = 22-15)
Answer is 5.
c) MC = 5, this happens at quantity 3 i.e. TC3-TC2=5.
Answer is 3.
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