a. If price is $3 per unit of output, the manager should produce _____________ u
ID: 1203960 • Letter: A
Question
a. If price is $3 per unit of output, the manager should produce _____________ units.
b. Since average total cost is $________ for this output, total cost is $___________.
c. The firm makes a profit of $_____________.
d. Let price fall to $1, the manager should now produce ________ units.
e. At a price of $1, total revenue is $____ and total cost is $____. The firm makes a loss of $___.
f. At a price of $1, total variable cost is $_____, leaving $____in revenue to apply to fixed cost.
g. If price falls below $_____________, the firm will produce zero output.
Explanation / Answer
(a) A perfectly competitive firm maximizes profit equating Price with MC. So, when P = 3, MC = 3 and Q = 4,000
(b) When Q = 4,000, ATC = $2
Total cost = ATC x Q = $2 x 4,000 = $8,000
(c) Profit = Q x (P - ATC) = 4,000 x $(3 - 2) = 4,000 x $1 = $4,000
(d) At P = MC = $1, Q = 2,000
(e) When Q = 2,000, ATC = $1.5
Total revenue = P x Q = $1 x 2,000 = $2,000
Total cost = $1.5 x 2,000 = $3,000
Loss = TC - TR = $(3,000 - 2,000) = $1,000
(f) When Q = 2,000, AVC = $0.4
TVC = AVC x Q = $0.4 x 2,000 = $800
This leaves $(3,000 - 800) = $2,400 for fixed cost.
(g) If price is less than $0.4 (lowest point of AVC), it will shut down & produce zero output.
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