Profit is equal to revenue minus cost, where revenue equals price times quantity
ID: 1218582 • Letter: P
Question
Profit is equal to revenue minus cost, where revenue equals price times quantity of output, while cost equals the wage rate times employment (assuming wages are the only cost of production). Assume that, on average, each firm produces 100 units of output a day, employs 90 workers, and pays a wage of $100 a day.
a) As the price of output rises from $80 to $90, $100, $110, and $120, show how the profitability of firms changes.
b) At which of these price levels will firms have an incentive to raise or lower output?
c) From these observations, construct an aggregate supply curve.
Explanation / Answer
cost=90*100=$9000
when price=$80
revenue=$8000
profit=8000-9000= -$1000
price=$90
profit=90*100-9000=$0
price=$100
profit=100*100-9000=$1000
price=$110
profit=110*100-9000=$2000
price=$120
profit =120*100-9000=$3000
b) since at each price level profit is increasing therefore he will increase his output at each price level.
c)since the aggregate quantity supplied remain the same irrespective of change in price a firm faces an inelastic supply curve parallel to y axis
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