The accompanying graph summarizes the demand and cost for a firm that operates i

Question

The accompanying graph summarizes the demand and cost for a firm that operates in a perfectly competitive market.
a. What level of output should this firm produce in the short run?
b. What price should this firm charge in the short run?
c. What is the firm's total cost at this level of output?
d. what is the firm's total variable cost at this level of output?
e. What is the firm's fixed cost at this level of output?
f. What is the firm's profit if it produces this level of output?
g. What is the firm's profit if it shuts down?
h. In the long run, should this firm continue to operate or shut down?

Explanation / Answer

I hope this helps. a.In the short run the firm should produce where MC curve intersects the MR or D curve. On the graph it looks like this is at a quantity of 7. b. The price demanded at a quantity of 7 is 28. (perfectly competitive so there is a constant price of 28 for all quantities). The firm should charge 28. c.The firms average total cost for producing 7 units is 32 so its total cost is 7(32)= 224 d.Its average variable cost for producing 7 units is 14 so its total variable cost is 7(14) = 98 e.Its fixed costs would be the total costs - variable costs = 224 -98 = 124 (also read on the graph as 7(18)) f. The firms profits are total revenue - total cost = (7)(25) - 224 = 175 - 224 = -49 g. If the firm shuts down then it only incurs fixed costs and its profits are -124 h. In the long run, the firm will continue to operate because the marginal revenue of 25 is greater than the average variable cost of 14. The fixed costs are sunk costs so they should not be taken into consideration when considering shutdown.

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