Question

5. Profit maximization and shutting down in the short run Suppose that the market for blenders is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. 100T 90 80 TC C 70 2 50 a 40 30 AVC 20 10 0 5 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of blenders)

Answer 1

In the perfect competitive market, the firm will produce that level of output where price is equal to marginal cost (MC) The following formula are used to fill the table Total revenue is obtained by multiplying price with quantity Total variable cost is obtained by multiplying average variable cost with the quantity Total cost is the sum of total variable cost (TVC) and total fixed cost (FC) TC =TVC + TFC profit =Total revenue-total cost at the price of S25 per blender, the firm produces 30,000 of blenders because at this quantity, price is equal to marginal cost. -$25 x 30, 000 $750,000 TVC $25 x 30,000 $750,000 TC - 750, 000+1,600,000 $2,350,000 profit =Total revenue-total cost -$750,000-S2,350,000 $1, 600,000 Similarly, find for other prices as shown in table below:

Total revenue Price (SQuantity fixed cost Variable total costProfits 30000750000 1600000 750000 2350000-1600000 Costc 25 70 100450004500000 1600000 1665000 3265000 1235000 400002800000 1600000 1200000 2800000 0 The shutdown of the firm is obtained at the minimum point at AVC. Thus, shut down point is $25.