Question

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Principles of Microeconomics Spring 2020—Exam No. 2 FORMA Part A. Answer all of the questions (3 points each). TC TC Use the table below to answer the next 5 questions. Assume the firm operates in a pure competition market. 0 25 60 135 70 2 44 84 105 What is the average variable cost of producing 5 units? a. $9 b. $10 c. $14 d. $70 What is the marginal cost of producing the third unit? a. $ 7 b . $8.67 c, $10 d. $51 What is the average total cost of producing 4 units? a. $8.75 b. $9 c. $10 d. $15 If output sells for $9 per unit then how many units should the profit maximizing firm produce? a. 0 b. 4 c. 5 d. 6 If the price is now $8 then how many units should the firm produce? b. 3 c. 4 d. 5 a. 0 Which of the following forms of business organization is most numerous in the United States? a. partnerships corporations b. proprietorships government-owned firms

Answer 1

Below table shows the calculations of various costs at different levels of output:

Output	TFC	TVC	TC	AFC	AVC	AC	MC
0.00	25.00	0.00	25.00
1.00	25.00	10.00	35.00	25.00	10.00	35.00	10.00
2.00	25.00	19.00	44.00	12.50	9.50	22.00	9.00
3.00	25.00	26.00	51.00	8.33	8.67	17.00	7.00
4.00	25.00	35.00	60.00	6.25	8.75	15.00	9.00
5.00	25.00	45.00	70.00	5.00	9.00	14.00	10.00
6.00	25.00	59.00	84.00	4.17	9.83	14.00	14.00
7.00	25.00	80.00	105.00	3.57	11.43	15.00	21.00

• TFC remains the same for all units of output.
• TC = TFC+TVC, Using this formula, TFC for output 1 = 25 as TVC = 0, For all other outputs TVC is calculated
• AFC = TFC/output
• AVC = TVC/output
• AC = TC/output
• $MC_{n} = \frac{TC_{n} - TC_{n-1}}{Output_{n} - Output_{n-1}}$
  • So
  • 
    TC-TC MC2 Output - Outputn-1 44 – 35 MC2= 2-1 MC2=9
    
  • Similarly the MC can be calculated for all levels

1. AVC at 5 units is 9 so the correct option is a
2. MC for 3 units is 7 so the correct option is a
3. AC for 4 units is 15 so the correct option is d

Q4) If price = 9

Output	TFC	TVC	TC	AFC	AVC	AC	Price = AR	TR	Profit	MR	MC
0.00	25.00	0.00	25.00				9.00	0.00	-25.00
1.00	25.00	10.00	35.00	25.00	10.00	35.00	9.00	9.00	-26.00	9.00	10.00
2.00	25.00	19.00	44.00	12.50	9.50	22.00	9.00	18.00	-26.00	9.00	9.00
3.00	25.00	26.00	51.00	8.33	8.67	17.00	9.00	27.00	-24.00	9.00	7.00
4.00	25.00	35.00	60.00	6.25	8.75	15.00	9.00	36.00	-24.00	9.00	9.00
5.00	25.00	45.00	70.00	5.00	9.00	14.00	9.00	45.00	-25.00	9.00	10.00
6.00	25.00	59.00	84.00	4.17	9.83	14.00	9.00	54.00	-30.00	9.00	14.00
7.00	25.00	80.00	105.00	3.57	11.43	15.00	9.00	63.00	-42.00	9.00	21.00

• TR = Price x units
• 
  TR2-TR1 Output - Output-1 18 – 9 MR2= 2-1 MR2=90
  
• So the profit maximising out put is where MR = MC which happens at 4 units so the correct option is b

Q5) If price = 8

Output	TFC	TVC	TC	AFC	AVC	AC	Price = AR	TR	Profit	MR	MC
0.00	25.00	0.00	25.00				8.00	0.00	-25.00
1.00	25.00	10.00	35.00	25.00	10.00	35.00	8.00	8.00	-27.00	8.00	10.00
2.00	25.00	19.00	44.00	12.50	9.50	22.00	8.00	16.00	-28.00	8.00	9.00
3.00	25.00	26.00	51.00	8.33	8.67	17.00	8.00	24.00	-27.00	8.00	7.00
4.00	25.00	35.00	60.00	6.25	8.75	15.00	8.00	32.00	-28.00	8.00	9.00
5.00	25.00	45.00	70.00	5.00	9.00	14.00	8.00	40.00	-30.00	8.00	10.00
6.00	25.00	59.00	84.00	4.17	9.83	14.00	8.00	48.00	-36.00	8.00	14.00
7.00	25.00	80.00	105.00	3.57	11.43	15.00	8.00	56.00	-49.00	8.00	21.00

As the AVC is not getting recovered, it is better to shut down. AR<AVC at every unit so the loss is minimum at 0 level of output. so the correct option is a

Q6) The maximum number of organizations are of sole proprietorship in the US so the correct option is b