Question

Table 3 Again, it's a new price so only the Total Revenue, Marginal Revenue, and Profit/Loss calculations will change. You can just copy all of the costs columns from a previous Table. Price = Total Product 32 Fixed Cost Variable Cost Total Cost Average Variable Marginal Cost Cost Total Marginal Revenue Revenue Profit or Loss ||||||||||| III LIITTI What is the optimum level of production in units? What is the profit or loss at this point? Should this company produce? Why?

Answer 1

When price= 32

Following is the completed table:

Output TFC 0.00 160.00 1.00 60.00 2.00 60.00 3.00 60.00 4.00 60.00 5.00 60.00 6.00 60.00 7.00 60.00 8.00 60.00 9.00 60.00 10.00 60.00 TVC TC 0.00 45.00 85.000 120.00 150.00 185.00 2 25.00 270.00 325.00 390.00 465.00 A FC AVC AC Price = AR TR 60.00 32.00 105.00 60.00 45.00 105.00 32.00 145.00 30.00 42.50 72.50 32.00 180.00 20.00 40.00 60.00 32.00 210.00 15.00 37.50 52.50 32.00 245.00 12.00 37.00 49.00 32.00 285.00 10.00 37.50 47.50 32.00 330.00 8.57 38.57 47.14 3 2.00 385.00 7.50 40.63 48.13 32.00 450.00 6.67 43.33 50.00 32.00 525.00 6.00 46.50 52.50 32.00 Profit MRMC 0.00 -60.00 32.00 -73.00 32.00 45.00 64.00 -81.00 32.00 40.00 96.00 -84.00 32.00 35.00 128.00 -82.00 32.00 30.00 160.00 -85.00 32.00 35.00 192.00 -93.00 32.00 40.00 224.00 -106.00 32.00 45.00 256.00 -129.00 32.00 55.00 288.00 -162.0032.00 65.00 320.00 -205.00 32.00 75.00

• TC = TFC+TVC,
• TFC remains the same for all units of output. So if TC is given for units 0 10 when there is no TVC, then we know that the TC = TFC = 60
• Using this we calculate the TVC at each level as TC-TFC
• AFC = TFC/output
• AVC = TVC/output,
• AC = TC/output
• $MC_{n} = \frac{TC_{n} - TC_{n-1}}{Output_{n} - Output_{n-1}}$
• TR = Price x output
• 
  | TRỊ - TR-1 MRR = Output - Outpun
  
• Profit = TR-TC
• So at the price of 32, there is no optimal level of output
• The company should stop producing because AVC>AR and loss is lower when the company is not producing at 60 than at any level of output

Price = 41

Output TFC 0.00 160.00 1.00 60.00 2.00 60.00 3.00 60.00 4.00 60.00 5.00 60.00 60.00 7.00 60.00 8.00 60.00 9.00 60.00 10.00 60.00 TVC TC 0.00 45.00 85.00 120.00 150.00 185.000 225.00 270.00 325.00 390.00 465.00 A FC AVC AC Price = AR TR 60.00 41.00 105.00 60.00 45.00 105.00 41.00 145.00 30.00 42.50 72.50 41.00 180.00 20.00 40.00 60.00 41.00 210.00 15.00 37.50 52.50 41.00 245.00 12.00 37.00 49.00 41.00 285.00 10.00 37.50 47.50 41.00 330.00 8.57 38.57 47.14 4 1.00 385.00 7.50 40.63 48.13 41.00 450.00 6.67 43.33 50.00 41.00 525.00 6.00 46.50 52.50 41.00 Profit MRMC 0.00 -60.00 41.00 -64.00 41.00 45.00 82.00 -63.00 41.00 40.00 123.00 -57.00 41.00 35.00 164.00 -46.00 41.00 30.00 205.00 -40.00 41.00 35.00 246.00 -39.00 41.00 40.00 287.00 -43.00 41.00 45.00 328.00 -57.00 41.00 55.00 369.00 -81.00 41.00 65.00 410.00 -115.00 41.00 75.00 6.00

• Optimal level of production is 6 units. Although MR=MC but that happens somewhere in between units 6 and 7 but as units can't be fractional, so 6 units is where the loss is minimum
• Loss = $39
• Firm should produce because loss when it produces 6 units is 39 while that when it shuts down = fixed cost = 60

Price = 56

56.00 Output TFC 0.00 160.00 1.00 60.00 2.00 60.00 3.00 60.00 4.00 60.00 5.00 60.00 6.00 60.00 7.00 60.00 8.00 60.00 9.00 60.00 10.00 60.00 TVC TC 0.00 45.00 85.000 120.00 150.00 185.00 225.00 270.00 325.00 390.00 465.00 A FC AVC AC Price = AR TR 60.00 105.00 60.00 45.00 105.00 56.00 145.00 30.00 42.50 72.50 56.00 180.00 20.00 40.00 60.00 56.00 210.00 15.00 37.50 52.50 56.00 245.00 12.00 37.00 49.00 56.00 285.00 10.00 37.50 47.50 56.00 330.00 8.57 38.57 47.14 56.00 385.00 7.50 40.63 48.13 56.00 450.00 6.67 43.33 50.00 56.00 525.00 6.00 46.50 52.50 56.00 Profit MRMC 0.00 -60.00 56.00 -49.00 56.00 45.00 112.00 -33.00 56.00 40.00 168.00 -12.00 56.00 35.00 224.00 14.00 56.00 30.00 280.00 35.00 56.00 35.00 336.00 51.00 56.00 40.00 392.00 62.00 56.00 45.00 448.00 63.00 56.00 55.00 504.00 54.00 56.00 65.00 560.00 35.00 56.00 75.00

• Optimal level of production is 8 units. Although MR=MC but that happens somewhere in between units 8 and 9 but as units can't be fractional, so 8 units is where the profit is maximum
• Profit = 63
• Firm should produce because it makes a profit