3. Total Total Average Fixed Variable Total Total Marginal Quantity Cost Cost Co

Question

3.
Total Total Average
Fixed Variable Total Total Marginal
Quantity Cost Cost Cost Cost Cost
0 $40 0 40 X X
1 40 55 95 95 55
2 40 75 115 57.50 20
3 40 90 130 43.33 15
4 40 110 150 37.50 20
5 40 135 175 35 25
6 40 170 210 35 35
7 40 220 260 37.14 50
8 40 290 330 41.25 70
a) At a product price of $72, how many units will this firm produce in the short-run? EXPLAIN. What will be its profits or losses?



b) At a product price of $52, how many units will this firm produce in the short-run? EXPLAIN. What will be its profits or losses?



c) At a product price of $28, how many units will this firm produce in the short-run? EXPLAIN. What will be its profits or losses?

Explanation / Answer

If I'm reading this right, the last column is the marginal cost a) at a price of $72 the marginal revenue is $72. Firms will produce where marginal cost equals marginal revenue. The 8th unit has a marginal cost of $70. Since this is less than $72 it is still profitable to produce this unit, so 8 units will be produced. Profits = Total revenue - total cost. Selling 8 units at $72 each gives a TR of $576. The total costs are $330 so profit = 576 - 330 = $246 b) At a price of $52, the marginal revenue is $52. The 7th unit has a marginal cost of $50, so it is still profitable to produce 7 units. However the 8th unit has a marginal cost of $72, so it would not be profitable to produce 8 units at this price. The quantity produced would thus be 7 units. Again Profit = TR - TC. 7 units at $52 = $364. Total costs at 7 units is $260. So Profit = $104 c) At 5 units the marginal cost is $25. This is the last unit below the product price of $28. (Producing the 6th unit would cost an additional $35, so it would not be worth it). 5 units would be produced at a price of $28. 5 units at $28 gives a total revenue of $140. The total costs of producing 5 units is $175, so profits would be $140-175 = -$35 or a loss of $35

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