2 Given the following short run production cost schedule: Short Run Total Cost F

Question

2 Given the following short run production cost schedule:

Short Run Total Cost Function

The table above gives the short run total cost function for a typical firm in a perfectly competitive industry.

(a) What is the dollar value of the firm’s total fixed cost?

(b) Calculate the marginal cost of producing the first unit of output?

(c) If the price the firm receives for its product is $20, indicate the firm’s profit maximizing quantity of output.

(d) Explain your answer in (c ) above.

(e) Given your results, what will happen to number of firms in the industry in the long run (assuming there is no barrier to entry). Explain.

(f) Input the above data in Excel and draw, using Excel, the (1)Total Cost, (2)Fixed Cost and (3)Average Variable Cost curves for the above firm

Quantity Produced Total Cost ($) 0 20 1 27 2 38 3 53 4 73 5 100 6 130

Explanation / Answer

(a) $20. Because at 0 output TC is 20 means, it is the FC.

(b) $7 (i.e. 27-20)

(c) profit maximizing quantity of output = 4

(d) At Q = 4, profit maximizing condition: MR = MC = 20 is fulfilled. The firm earns maximum profit of $7.

(e) Due to this positive profit, the new firms will enter into the industry in the long run till every firm earns normal profit.

(f) See the table above.

Quantity Produced Total Cost ($) TFC TVC AVC = TVC/Q MC TR= (P*Q) MR Profit 0 20 20 0 0 - 0 - -20 1 27 20 7 7 7 20 20 -7 2 38 20 18 9 11 40 20 2 3 53 20 33 11 15 60 20 7 4 73 20 53 13.25 20 80 20 7 5 100 20 27 5.4 27 100 20 0 6 130 20 30 5 30 120 20 -20

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.