Question

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Q6: (3 Marks) a. If a competitive firm is making loss in the short run, and it is selling a (100) units of a good at S.R(9). To be known that the AVC is S.R(10). What should the firm decide? If the quantity produced changed from 1 to 2, the total cost changed from 64 to 80 and the price is 40. b. What is the total revenue? c. What is the marginal cost?

Answer 1

Answer to the question no. a:

In teh short run a firm produces even if it incurs loss as long as it can cover its AVC. When the price falls below the AVC, the firm decides to shut down and exit from the market. So, in this case the AVC is 10 and the market price is 9, meaning that AVC>Price. Thus, the firm will exit from the market and shut down its operation.

Answer to the question no. b and c:

We have the following information:

Quantity	Price	TC	MC
1	40	64	----
2	40	80	80-64=16

The total revenue is Price x Quantity. Thus, when the output is 1, the Toal Revenue is 40 x 1=40.

Again, when the output is 2, the Toal Revenue is 40 x 2=80

Now, the MC can be found using the following formula as:

$MC_n=TC_n-TC_{n-1}$

$MC_2=TC_2-TC_{1}$

$MC_2=80-64=16$

Using this formula we have found the MC. The MC at Q=2 is 16.

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