Suppose that in order to produce any positive amount of output, a firm must buil

Question

Suppose that in order to produce any positive amount of output, a firm must build an operating facility which costs $40. The Variable Cost of production is equal to 6q, where q is the quantity of output. Therefore the Marginal Cost of production is constant at MC = $6. If the firm decides not to produce, it does not build the operating facility, and so it incurs 0 costs. The demand facing the firm is given by P = 20 – 2q.

a) (3 points) What is the Average Total Cost of producing 5 units of output?

b) (3 points) What amount of output should the firm produce in order to maximize its profit?

c) (3 points) What is the socially optimal level of output?

d) (3 points) What is the total social welfare of the socially optimal level of output?

Explanation / Answer

TC = FC + VC

= 40 + 6*5

= 70

ATC = TC/5 = 14.

b. There is no maximum profit for the firm. Because revenue is always lesser than the total cost.

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