Question

A firm is operating in the short run. Here is some of the information about the firm's operation.

1. The short run fixed costs for the firm are $50.
2. The wage rate for each employee is $120 per day
3. The Production Function is below

Production Function
Labor	Daily Output
1	60
2	130
3	200
4	260
5	310
6	320
7	325
8	326

Variable Resources	Output	MP	TFC	TVC	TC	MC	ATC	AFC	AVC
0	0		50	0	50
1	60	60	50	120	170	2	2.83	.83	2
2	130	70	50	240	290	1.71	2.23	.38	1.85
3	200	70	50	360	410	1.71	2.05	.25	1.8
4	260	60	50	480	530	2	2.04	.19	1.85
5	310	50	50	600	650	2.4	2.10	.16	1.94
6	320	10	50	720	770	12	2.41	.16	2.25
7	325	5	50	840	890	24	2.73	.15	2.58
8	326	1	50	960	1010	120	3.1	.15	2.94

Using the chart , answer the question.

If the firm is in profit maximizing mode and facing a market price of $2.35, at what output listed on the chart should it produce? Why should it produce at that level?

Answer 1

Ans: If the firm is in profit maximizing mode and facing a market price of $2.35, it should produce 260 units of output. Because the profit maximizing condition is where price equals marginal cost or price is greater than marginal cost ( P = MC ) or ( P > MC) . If the firm produces beyond this level then the profit will start to decline.

Explanation:

Variable Resources	Output	MP	TFC	TVC	TC	MC	ATC	AFC	AVC	TR	MR	Profit
0	0	---	50	0	50	---	---	---	---	0	---	-50
1	60	60	50	120	170	2	2.83	0.83	2	141	2.35	-29
2	130	70	50	240	290	1.71	2.23	0.38	1.85	305.5	2.35	15.5
3	200	70	50	360	410	1.71	2.05	0.25	1.80	470	2.35	60
4	260	60	50	480	530	2.00	2.04	0.19	1.85	611	2.35	81
5	310	50	50	600	650	2.40	2.10	0.16	1.94	728.5	2.35	78.5
6	320	10	50	720	770	12	2.41	0.16	2.25	752	2.35	-18
7	325	5	50	840	890	24	2.74	0.15	2.58	763.75	2.35	-126.25
8	326	1	50	960	1010	120	3.10	0.15	2.94	766.1	2.35	-243.9