Question

The graph below shows the marginal, average variable, and average total cost curves for a perfectly competitive firm. Refer to the graph to answer the following questions. Instructions: Indicate the profit-maximizing level of output. Enter your response as a whole number. Price and cost MC ATC AVC $40.50 36.00 30.00 MR 22.00 20.00 130 180 240 Quantity a. What is the amount of the fixed cost of production? $ b. Suppose the market price is $30 what is the firm's profit-maximizing level of output? units. c. What is the total cost of production at the profit maximizing output? $D d. What is the variable cost at the profit maximizing output? $ e. What is the total revenue? $ f. At the profit-maximizing level of output, the producer's profit is: $ Include a minus sign if it is a loss. g. Suppose the firm's fixed cost rises by $100, then (Click to select) h. If the price falls to $15 per unit, what is this firm's profit-maximizing level of output? units.

Answer 1

(a) Fixed cost = (ATC-AVC)Q = (40.50-30)(240)= $2520.

(b) Profit maximizing condition under perfectly competitive market is P=MC. So, if market price is $30 ,the profit maximizing level of output is 180 units.

(c) Total cost of production at this output level = ATC(Q) = (36)(180)= $6480.

(d) The variable cost at Q=180 is AVC(Q) = (22)(180)= $3960.

(e) Total revenue = (P)(Q)= (30)(180)=$5400

(f) At profit maximizing output level , profit = TR-TC = $(5400-6480)= -$1080 (i.e loss).

(g) Suppose firm's fixed cost rises by $100 ,then ATC would increase.

(f) If P falls to $15 per unit , then firm's profit maximizing level of output is 0 , because P<minimum AVC , so firm would shut down.