Question

1. (10 pts) A firm has the following relationship between output (Q) and total cost (TC):

Q	TC
0	$100
1	110
2	130
3	160
4	200
5	250
6	310
7	380
8	460
9	550
10	650

1. Say the firm is a perfect competitor. If the market price for its product is $ 80, at what output level will this firm produce at (as a profit maximizer)?

2. At the output level in (a), are firms in this industry making a profit or loss? Will firms enter or exit the market?

3. Say this firm is a monopoly. If the firm maximizes profit where marginal revenue equals $ 50, at what output level will the firm be producing at (as a profit maximizer)?

Answer 1

MC = Change in TC / Change in Q

Output	TC	MC
0	100
1	110	10
2	130	20
3	160	30
4	200	40
5	250	50
6	310	60
7	380	70
8	460	80
9	550	90
10	650	100

a. In perfect competition profit is maximized when P = MC

Here P = MC = 80 at output level of 8

b. Profit / Loss = TR - TC = 8 * 80 - 460 = 640 - 460 = 180

As Firm is earning positive profit, firms will enter the market

c. In a monopoly, profit is maximized where MR = MC

Here MR = MC = 50 at output level of 5