The following data are for the weekly production of a firm operating in a purely
ID: 1097508 • Letter: T
Question
The following data are for the weekly production of a firm operating in a purely competitive market:
Quantity
AFC
AVC
ATC
MC
0
---------
-----
-----
----
1
$80.00
$17.00
$97.00
$17
2
40.00
16.00
56.00
15
3
26.67
15.00
41.67
13
4
20.00
14.25
34.25
12
5
16.00
14.00
30.00
13
6
13.33
14.00
27.33
14
7
11.43
15.71
27.14
26
8
10.00
17.50
27.50
30
9
8.89
19.44
28.33
35
10
8.00
21.60
29.60
41
11
7.27
24.00
31.27
48
12
6.67
26.67
33.34
56
a) What is the firm's short run profit?maximizing or loss?minimizing level of output and its total profit or loss at each of the following market prices?
PROFIT
PRICE QUANTITY OR LOSS
$13
20
32
42
b)
1. At what level of output does diminishing returns start?
2. Of all possible prices (not just those shown above), what is the minimum price required for the firm to keep operating in the short run?
3. Of all possible prices (not just those shown above), what is the minimum price required for the firm to keep operating in the long run?
Quantity
AFC
AVC
ATC
MC
0
---------
-----
-----
----
1
$80.00
$17.00
$97.00
$17
2
40.00
16.00
56.00
15
3
26.67
15.00
41.67
13
4
20.00
14.25
34.25
12
5
16.00
14.00
30.00
13
6
13.33
14.00
27.33
14
7
11.43
15.71
27.14
26
8
10.00
17.50
27.50
30
9
8.89
19.44
28.33
35
10
8.00
21.60
29.60
41
11
7.27
24.00
31.27
48
12
6.67
26.67
33.34
56
Explanation / Answer
Table showing total cost at different output
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Statement showing profit/loss at different price level
TR
P=13
TR
P=20
TR
P=32
TR
P=42
Profit
P=13
Profit
P=20
Profit
P=32
Profit
P=42
Result: 1. Minimum loss is $84 at price of $13 and quantity Q=1
2. Minimum loss is $44 at price of $20 and quantity Q=6
3. Maximum profit is $36 at price of $32 and quantity Q=8
4. Maximum profit is $124 at price of $42 and quantity Q=10
--------------------------------------------------------------------------------------------------------------------------------
Answer 1:When output is increasing at a reduced rate due to increse in output, thelaw of diminishing return becomes operative. As a result of it average variable cost will start increasing. It is observed from table 1 that AVC has started rising after 6 units. Therefore from 7th unit law of diminishing return has become operative.
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Answer of part 2: A firm will operate in the short run even at a loss if it can recover at least average variable cost. Note that AVC is mimimum at $14. Thus any price below $14 will mean AVC is not recovered. Thus firm mwill stop production if price goes below $14.
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Answer of part 3: In the long run firm will not produce unless normal profit is earned. It is possible if it can recover average cost. AC is minimum at $27.14. So at price below $27.14 firm will stop production.
Q AFC AVC ATC MC TFC TVC TC 0 0 0 0 0 80 0 0 1 80 17 97 17 80 17 97 2 80 16 56 15 80 32 112 3 80 15 41.67 13 80 45 125 4 80 14.25 34.25 12 80 57 137 5 80 14 30 13 80 70 150 6 80 14 27.33 14 80 84 164 7 80 15.71 27.14 26 80 110 190 8 80 17.50 27.50 30 80 140 220 9 80 19.44 28.33 35 80 175 255 10 80 21.6 29.60 41 80 216 296 11 80 24.0 31.27 48 80 264 344 12 80 26.67 33.34 56 80 320 400Related Questions
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