1. (42 total points) Suppose that a monopolistically competitive firm must build
ID: 1245456 • Letter: 1
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1. (42 total points) Suppose that a monopolistically competitive firm must build a production facility in order to produce a product. The fixed cost of this facility is FC = $24. Also, the firm has constant marginal cost, MC = $3. Demand for the product that the firm produces is given by P = 27-3Q. a) (27 points) Fill in the table below. If any of your values have decimals, you may round to only one numeral after the decimal (nearest 10th of a dollar). Quantity of Output Price Total Cost Average Total Cost Total Revenue Profits 1 2 3 4 5 6 7 8 9 b) (10 points) How much output will this firm produce if it maximizes profit? c) (5 points) What price should this firm charge if it wants to maximize profit?Explanation / Answer
Do you know the definitions of each of these terms? Might help. You start off with quantity Q in your column. Let's take Q = 5 as our example. When Q=5, what does price equal? P = 27 - 3Q = 27 - 3*5 = 27 - 15 = 12 What does total cost equal? Total cost is the sum of all costs, so if you have fixed cost of 24, and cost per unit (aka marginal cost) of 3, then total cost = 24 + 3*Q = 24 + 3*5 = 24 + 15 = $39 What is average total cost? The total cost per unit. Total cost = 39 Number of units = 5 Average total cost = 39 / 5 = $7.8 Total revenue is equal to price multiplied by quantity (the money you make) Total revenue = Q * P = 5 * 12 = $60 And finally profit = total revenue minus total cost this is the amount of money we're left with after we take all the money and pay all our costs Profit = 60 - 39 = $21 That's just for Q=5. Now repeat for each of Q=1, Q=2, Q=3, etc etc
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