Suppose the demand for the firm’s product decreases and the market price falls t
ID: 1219631 • Letter: S
Question
Suppose the demand for the firm’s product decreases and the market price falls to $14 and we have the following table. Should the firm shut down? If not, how much output should the firm produce? Explain.
1
2
3
4
5
6
7
Quantity(Q)
Total Cost (TC)
Average Total Cost (ATC)
Marginal Cost (MC)
Total Revenue (TC)
Marginal Revenue (MR)
Profit Margin (PM)
Total Profit (TP) (d)
0
1,000
-
-
0
-
-
-1,000
100
2,000
20
10
1400
14
-43%
-600
200
3,300
16.5
13
2800
14
-18%
-500
300
4,800
16
15
4200
14
-14%
-600
400
7,000
17.5
22
5600
14
-25%
-1,400
500
9,600
19.2
26
7000
14
-37%
-2,600
1
2
3
4
5
6
7
Quantity(Q)
Total Cost (TC)
Average Total Cost (ATC)
Marginal Cost (MC)
Total Revenue (TC)
Marginal Revenue (MR)
Profit Margin (PM)
Total Profit (TP) (d)
0
1,000
-
-
0
-
-
-1,000
100
2,000
20
10
1400
14
-43%
-600
200
3,300
16.5
13
2800
14
-18%
-500
300
4,800
16
15
4200
14
-14%
-600
400
7,000
17.5
22
5600
14
-25%
-1,400
500
9,600
19.2
26
7000
14
-37%
-2,600
Explanation / Answer
The Total fixed cost of the firm = $1000. ( TC at Quantity = 0)
Since price = marginla cost in case of perfect competition. The market structure is perfectly competitive as Marginal revenue is constant . So, demand curve por average reveune is horizontal or perfectly elastic.
So, the firm will be producing on outout between 200 and 300 units.
At this level of the output, the losses to the firm will be between $600 and $500. Thus, firms will be incurring losses less than TFC. And is covering a part of the TFC. By shutting down the losses will be equal to $1000. SO, the firm should continue production and should not shut down.
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