Suppose that the marginal cost of producing output, q, in the short-run for a co

Question

Suppose that the marginal cost of producing output, q, in the short-run for a competitive firm is MC = 10 + 8q. The market price of the firm’s product is $25.

a. (2 pts) What level of output will the firm produce to maximize its profits?

b. (3 pts) Assume that the firm’s fixed costs are $5, and the firm’s average variable cost is given by AVC = 10 + 4q. What are the short-run total costs at the level of output the firm produces?

c. (3 pts) What are the profits in the short-run?

d. (10 pts) Show the level of profits in a graph.

Explanation / Answer

a. To maximise profits, we equate MC= MR

Here, 10+8q = 25

q= 15/8= 2 approx

b. TC= AC*q = (5+10+4q )*q = 15q+4q^2 = 15*2+4*4 = 46

Profit= TR-TC = 25*q- 46 = 50-46=4

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