Self-Check Questions
Q1
Look at Table below. What would happen to the firm’s profits if the market price increases to \($6\) per pack of raspberries?
Quantity |
Total Cost |
Fixed Cost |
Variable Cost |
Total Revenue |
Profit |
0 |
$62 |
$62 |
- |
$0 |
−$62 |
10 |
$90 |
$62 |
$28 |
$60 |
−$30 |
20 |
$110 |
$62 |
$48 |
$120 |
$10 |
30 |
$126 |
$62 |
$64 |
$180 |
$54 |
40 |
$144 |
$62 |
$82 |
$240 |
$96 |
50 |
$166 |
$62 |
$104 |
$300 |
$134 |
60 |
$192 |
$62 |
$130 |
$360 |
$168 |
70 |
$224 |
$62 |
$162 |
$420 |
$196 |
80 |
$264 |
$62 |
$202 |
$480 |
$216 |
90 |
$324 |
$62 |
$262 |
$540 |
$216 |
100 |
$404 |
$62 |
$342 |
$600 |
$196 |
Q2
Suppose that the market price increases to \($6\), as shown in Table below. What would happen to the profit-maximizing output level?
Quantity |
Total Cost |
Fixed Cost |
Variable Cost |
Marginal Cost |
Total Revenue |
Marginal Revenue |
0 |
$62 |
$62 |
- |
- |
$0 |
- |
10 |
$90 |
$62 |
$28 |
$2.80 |
$60 |
$6.00 |
20 |
$110 |
$62 |
$48 |
$2.00 |
$120 |
$6.00 |
30 |
$126 |
$62 |
$64 |
$1.60 |
$180 |
$6.00 |
40 |
$144 |
$62 |
$82 |
$1.80 |
$240 |
$6.00 |
50 |
$166 |
$62 |
$104 |
$2.20 |
$300 |
$6.00 |
60 |
$192 |
$62 |
$130 |
$2.60 |
$360 |
$6.00 |
70 |
$224 |
$62 |
$162 |
$3.20 |
$420 |
$6.00 |
80 |
$264 |
$62 |
$202 |
$4.00 |
$480 |
$6.00 |
90 |
$324 |
$62 |
$262 |
$6.00 |
$540 |
$6.00 |
100 |
$404 |
$62 |
$342 |
$8.00 |
$600 |
$6.00 |
Q3
Explain in words why a profit-maximizing firm will not choose to produce at a quantity where marginal cost exceeds marginal revenue.
Q4
A firm’s marginal cost curve above the average variable cost curve is equal to the firm’s individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm’s individual supply curve if marginal costs increase?
Review Questions
Q5
How does a perfectly competitive firm decide what price to charge?
Q6
What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?
Q7
How does a perfectly competitive firm calculate total revenue?
Q8
Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.
Q9
What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?
Q10
How does the average cost curve help to show whether a firm is making profits or losses?
Q11
What two lines on a cost curve diagram intersect at the zero-profit point?
Q12
Should a firm shut down immediately if it is making losses?
Q13
How does the average variable cost curve help a firm know whether it should shut down immediately?
Q14
What two lines on a cost curve diagram intersect at the shutdown point?
Problems
Q17
The AAA Aquarium Co. sells aquariums for \(\$20\) each. Fixed costs of production are \(\$20\). The total variable costs are \(\$20\) for one aquarium, \(\$25\) for two units, \(\$35\) for the three units, \(\$50\) for four units, and \(\$80\) for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves.
Q18
Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for \(\$72\) each. The fixed costs of production are \(\$100\). The total variable costs are \(\$64\) for one unit, \(\$84\) for two units, \(\$114\) for three units, \(\$184\) for four units, and \(\$270\) for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit maximizing quantity?
Q19
A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \(\$250\). The marginal cost of producing computers is \(\$700\) for the first computer, \(\$250\) for the second, \(\$300\) for the third, \(\$350\) for the fourth, \(\$400\) for the fifth, \(\$450\) for the sixth, and \(\$500\) for the seventh.
- Create a table that shows the company’s output, total cost, marginal cost, average cost, variable cost, and average variable cost.
- At what price is the zero-profit point? At what price is the shutdown point?
- If the company sells the computers for \(\$500\), is it making a profit or a loss? How big is the profit or loss? Sketch a graph with \(AC\), \(MC\), and \(AVC\) curves to illustrate your answer and show the profit or loss.
- If the firm sells the computers for \(\$300\), is it making a profit or a loss? How big is the profit or loss? Sketch a graph with \(AC\), \(MC\), and \(AVC\) curves to illustrate your answer and show the profit or loss.
Solution
S1
Holding total cost constant, profits at every output level would increase.
S2
When the market price increases, marginal revenue increases. The firm would then increase production up to the point where the new price equals marginal cost, at a quantity of \(90\).
S3
If marginal costs exceeds marginal revenue, then the firm will reduce its profits for every additional unit of output it produces. Profit would be greatest if it reduces output to where \(MR = MC\).
S4
The firm will be willing to supply fewer units at every price level. In other words, the firm’s individual supply curve decreases and shifts to the left.