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Problem one

Q TC TFC TVC ATC AVC MC
0 100 Xxx Xxx xxx
1 180 100 80 180 80 180
2 250 100 150 125 75 70
3 310 100 210 103.3 70 60
4 400 100 300 100 75 90
5 550 100 450 110 90 150
6 750 100 650 125 130 200
7 1100 100 1000 157.14 142.86 350
8 1600 100 1500 200 187.5 500

 

  • If the price is $200, the firm will produce 6 units of output. This is because the firm will produce at a point where marginal cost equals to marginal revenue which is equal to the price of output.

MC = MR =P, therefore, MC = MR = 200.

  • Profits equals total revenue minus total cost

Π = TR – TC,

TR = PQ = 200 x 6 = 1200

TC = 750

Therefore, π = 1200 – 750

Thus, profits at this level of production is $450

  • If the market price is $350, the firm will produce 7 units. This is because the firm will produce at a point where marginal cost equals to marginal revenue which is equal to the price of output.

MC = MR =P, therefore, MC = MR = 350.

  • Profits equals total revenue minus total cost

Π = TR – TC,

TR = PQ = 350 x 7 = 2450

TC = 1100

Therefore, π = 2400 – 1100

Thus, profits at this level of production is $1300

Part two

  • In a perfectly competitive market, firm maximizes profit at a point where marginal cost equals to marginal revenue, which is also the price of the output. Therefore, from the graph profit maximizing output is 1,350 units.
  • Profits equals total revenue minus total cost

Π = TR – TC,

TR = PQ = 20 x 1350 = 27,000

TC = ATC x Q = 1,350 x 15 = 20,250

Therefore, π = 27,000 – 20,250

Thus, profits at this level of production is $6,750

  • The firm’s level of total fixed cost equals total cost minus total variable cost

TFC = TC – TVC

TC = ATC x Q = 1,350 x 15 = 20,250

TVC = AVC x Q = 11 x 1,350 = 14,850

TFC = 20,250 – 14,850

Therefore, total fixed cost equals $5400

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