CHAPTEr8 PROFIT MAXIMIZATIONAND COMPETITIVESUPPLY 一、QUESTIONS FOR REVIEW 1.Why would a firm that incurs losses choose to produce rather than shut down? Losses occur when revenues do not cover total costs.Revenues oould be greater than variable costs but not which the in the short run rather than shutting down,even though they are incurring a loss The firm should compare the level of loss with no production to the level of loss with positive production,and pick the option that results in the smallest loss.In the short run,losses will be minimized as long as the firm covers its variable costs.In the ngrun all ostsare variable,and thus,all costs must be covered if the firm is to min in busines 2.Explain why the industry supply curve is not the long-run industry marginal cost curve. In the short run a change in the market price induces the profit-maximizing firm to change its optimal kvel ofoutput Thisoptimal output occurs when price is equal to marginal cost,as long as marginal cost exceeds average variable cost.Therefore, variable cos In the the firm adjusts its inputsso that its longrun marginal cost is equal to the market prie.At this level of output,it is operating on a short-run marginal cost curve where short-run marginal cost is equal toprice.As the long-run price changes the firm gradually changes its mix of inputs to minimize cost.Thus the ng-run is this adjustment fromoofsort-run marginal eost curves to ar the Note also that in the long run there will be entrya nd the firm will earn zero profit so that any level ofoutput where MC>AC is not possible. 3.In long-run equilibrium,all firms in the industry earn zero economic profit Why is this true? The theory ofperfect competitionexplicitly assumes that there are noentry or exit barriers to new participants in an industry.With free entry,positive economic profits induce new entrants.As these firms enter,the supply curve shifts to the causing a fall in th price of the prod Entry will stop,and equilibrium will be achieved,when economic profits have fallen to zero. 4.What is the difference between economic profit and producer surplus?
CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY 一、QUESTIONS FOR REVIEW 1. Why would a firm that incurs losses choose to produce rather than shut down? Losses occur when revenues do not cover total costs. Revenues could be greater than variable costs, but not total costs, in which case the firm is better off producing in the short run rather than shutting down, even though they are incurring a loss. The firm should compare the level of loss with no production to the level of loss with positive production, and pick the option that results in the smallest loss. In the short run, losses will be minimized as long as the firm covers its variable costs. In the long run, all costs are variable, and thus, all costs must be covered if the firm is to remain in business. 2. Explain why the industry supply curve is not the long-run industry marginal cost curve. In the short run, a change in the market price induces the profit-maximizing firm to change its optimal level of output. This optimal output occurs when price is equal to marginal cost, as long as marginal cost exceeds average variable cost. Therefore, the supply curve of the firm is its marginal cost curve, above average variable cost. (When the price falls below average variable cost, the firm will shut down.) In the long run, the firm adjusts its inputs so that its long-run marginal cost is equal to the market price. At this level of output, it is operating on a short-run marginal cost curve where short-run marginal cost is equal to price. As the long-run price changes, the firm gradually changes its mix of inputs to minimize cost. Thus, the long-run supply response is this adjustment from one set of short-run marginal cost curves to another. Note also that in the long run there will be entry and the firm will earn zero profit, so that any level of output where MC>AC is not possible. 3. In long-run equilibrium, all firms in the industry earn zero economic profit. Why is this true? The theory of perfect competition explicitly assumes that there are no entry or exit barriers to new participants in an industry. With free entry, positive economic profits induce new entrants. As these firms enter, the supply curve shifts to the right, causing a fall in the equilibrium price of the product. Entry will stop, and equilibrium will be achieved, when economic profits have fallen to zero. 4. What is the difference between economic profit and producer surplus?
While economi profit is the difference between total revenue and total cost difference between economic profit and producer surplus is the fixed cost of production. 5.Why do firms enter an industry when they know that in the long run economic profit will be zero? Firms enter an industry when they expect to earn economic profit.These nmfite ae enough to eno economic profits in the bng tothe of the owners of firms.For example,the owner ofa small business might experience positive accounting profits before the poregone wages from running the business are subtracted from these profits If the revenue minus other oosts is just equal to what could be earned elsewhere.then the owner is indifferent to staving in business or exiting. 6.At the beginning of the twentieth century,there were e man. y small American automobile manufacturers.At the end of the century,there ar only three large ones. Suppose that this situation is not the result of lax federal enforcement of antimonopoly laws.How do you explain the decrease in the number of manufacturers?(Hint:What is the inherent cost structure ofthe automobile industry?) Automobile plantsare highly uming there have been no impediments to competition,increasing returns tocale can reduce the number firms in the long run.As firms grow,their costs decrease with increasing returns to scale.Larger firms are able to sell their product for a lower price and push out amaller firms in the long run.Increasing returns may cease at some level ofoutput. leaving more than one firm in the industry. 7.Industry X is characterized by perfect competition,so e ry firm in the industry is earning zero ec fit.If the product price falls,no firms can survive.Do you agree or disagree?Discuss. Disagree.As the market price falls,firms cut their production.If price falls below average total cost.firms continue to produce in the short run and cease production in the long run.If price falls below average variable costs,firms cease in price,ie.less than betw en the pric and ,the firm can urviv With larger price decrease,ie.greater than the difference between price and minimum average cost,the firm cannot survive.In general we would expect that some firms will survive and that just enough firms will kave to bring profit back up to zero 8.An increase in the demand for video films also increases the salaries of actors and actresses.Is the long-run supply curve for films likely to be horizontal or upward sloping?Explain
While economic profit is the difference between total revenue and total cost, producer surplus is the difference between total revenue and total variable cost. The difference between economic profit and producer surplus is the fixed cost of production. 5. Why do firms enter an industry when they know that in the long run economic profit will be zero? Firms enter an industry when they expect to earn economic profit. These short-run profits are enough to encourage entry. Zero economic profits in the long run imply normal returns to the factors of production, including the labor and capital of the owners of firms. For example, the owner of a small business might experience positive accounting profits before the foregone wages from running the business are subtracted from these profits. If the revenue minus other costs is just equal to what could be earned elsewhere, then the owner is indifferent to staying in business or exiting. 6. At the beginning of the twentieth century, there were many small American automobile manufacturers. At the end of the century, there are only three large ones. Suppose that this situation is not the result of lax federal enforcement of antimonopoly laws. How do you explain the decrease in the number of manufacturers? (Hint: What is the inherent cost structure of the automobile industry?) Automobile plants are highly capital-intensive. Assuming there have been no impediments to competition, increasing returns to scale can reduce the number of firms in the long run. As firms grow, their costs decrease with increasing returns to scale. Larger firms are able to sell their product for a lower price and push out smaller firms in the long run. Increasing returns may cease at some level of output, leaving more than one firm in the industry. 7. Industry X is characterized by perfect competition, so every firm in the industry is earning zero economic profit. If the product price falls, no firms can survive. Do you agree or disagree? Discuss. Disagree. As the market price falls, firms cut their production. If price falls below average total cost, firms continue to produce in the short run and cease production in the long run. If price falls below average variable costs, firms cease production in the short run. Therefore, with a small decrease in price, i.e., less than the difference between the price and average variable cost, the firm can survive. With larger price decrease, i.e., greater than the difference between price and minimum average cost, the firm cannot survive. In general, we would expect that some firms will survive and that just enough firms will leave to bring profit back up to zero. 8. An increase in the demand for video films also increases the salaries of actors and actresses. Is the long-run supply curve for films likely to be horizontal or upward sloping? Explain
The longrun supply curve depends on the cost structure of the industry.If there isa fixed supply of actors andactrea produed,higher must be offered. na increasing-cost industry,the long-run supply curve is upward sbping Thus,the supply curve for videos would be upward sloping. 9.True or false:A firm should always produce at an output at which long-run average cost is minimized.Explain. False.In the long run under perfect competition firms will produce where long-run aver its mix ofc mdIo the bng-ran the fimm edd ion,ent and exit will force price to adjust so it is close to minimum average cost.In the short run,however,the firm might not be producing the optimal long-run output. For example.if there are any fixed factors of production.the firm does not alwavs produce where long-run ave rage cost is minimized Also.in the short run the firm may be producing at point where marginal cost ata quantity that is different than that which corresponds to minimum long-run average cost. 10.Can there be constant returns to scale in an industry with an upward-sloping supply curve?Explain. Constant returns to scale imply that proportional increases in all inputs yield the same proportional increase in output.Pmoportional increases in inputs can induce higher prices if the supply curves or these inputs are upward sloping.For example. producton that depleting see higher production increases in scale.Doubling inputs will still yield double output,but because of rising costs,the firm cannot offer increasing amounts of the good without higher prices.Therefore,constant returns to scale does not always imply bng-run horizontal supply curves. 11.What assumptions are neo essary for a market to be perfectly competitive? In light of what you have learned in this chapter,why is each ofthese assumptions important? The two primary assumptions of perfect competition are (1)all firms in the industry are price takers and (2)there is free entry and exit of firms from the market.This chapter discusses how competitive equilibrium is achieved under these assumptions.The first assumption is important because it means that no firm has any market power.Give o firm ha market powor frms will produ where price is equal to marginal cost.In the short run price coud equal marginal cost at a quantity where marginal cost is greater than average cost,implying positive economic profits.With free entry and exit.positive economic profits would encourage other firms to enter.This entry exerts downward pressure on price until price is equal to both marginal cost and minimum average cost 12.Suppose a competitive industry faces an increase in demand (ie the demand curve shifts upward) What are the steps by which a competitive market insure
The long-run supply curve depends on the cost structure of the industry. If there is a fixed supply of actors and actresses, as more films are produced, higher salaries must be offered. Therefore, the industry experiences increasing costs. In an increasing-cost industry, the long-run supply curve is upward sloping. Thus, the supply curve for videos would be upward sloping. 9. True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain. False. In the long run, under perfect competition, firms will produce where long-run average costs are minimized. In the long-run, the firm will have adjusted its mix of capital and labor so that average costs are minimized. In addition, entry and exit will force price to adjust so it is close to minimum average cost. In the short run, however, the firm might not be producing the optimal long-run output. For example, if there are any fixed factors of production, the firm does not always produce where long-run average cost is minimized. Also, in the short run the firm may be producing at a point where price equals marginal cost at a quantity that is different than that which corresponds to minimum long-run average cost. 10. Can there be constant returns to scale in an industry with an upward-sloping supply curve? Explain. Constant returns to scale imply that proportional increases in all inputs yield the same proportional increase in output. Proportional increases in inputs can induce higher prices if the supply curves for these inputs are upward sloping. For example, production that uses rare or depleting inputs will see higher costs of production as production increases in scale. Doubling inputs will still yield double output, but because of rising costs, the firm cannot offer increasing amounts of the good without higher prices. Therefore, constant returns to scale does not always imply long-run horizontal supply curves. 11. What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important? The two primary assumptions of perfect competition are (1) all firms in the industry are price takers, and (2) there is free entry and exit of firms from the market. This chapter discusses how competitive equilibrium is achieved under these assumptions. The first assumption is important because it means that no firm has any market power. Given no firm has market power, firms will produce where price is equal to marginal cost. In the short run, price could equal marginal cost at a quantity where marginal cost is greater than average cost, implying positive economic profits. With free entry and exit, positive economic profits would encourage other firms to enter. This entry exerts downward pressure on price until price is equal to both marginal cost and minimum average cost. 12. Suppose a competitive industry faces an increase in demand (i.e., the demand curve shifts upward). What are the steps by which a competitive market insures
increased output?Will your answer change if the government imposes a price ceiling? If demand inereases with fixed supply,price and profits increas.The pric increase induces the firms in the industry to increase output Also,with positive profit,firms enter the industry,shifting the supply curve to the right.This results in a new equilibrium with a higher quantity produced and a price that earns all firms zero eopnomic profit.With an effective price ceiling.profit will be lower than withoutthece educing the terthe industry With economic proft,no firmenterand there isno shft in the supply curve. 13.The government passes a law that allows a substantial subsidy for every acr of land used to grow tobacco.How does this program affect the long-run supply curve for tobacco? A subsidy on tobacco production decreases the firm's costs of production. These cost decreases encourage other firms to enter tobacco production,and the supply curve for the industry shifts out to the right 14.A certain brand of vacuum cleaners can be purchased from several local stores as well as from several catalogue or web site sources. a.If all sellers charge the same price for the vacuum cleaner,will they all earn zero economic profit in the long run Yes by charging the same price they will all earn zero economic profit in the long run.If economic profit was greater than zero then firms would enter the industry and if economic profit was less than ero firms would exit the industry. b.Ifall charge the same price and one local building in which he d e asiness,paying no rent,is this eller earn ninga positive economic profit? No this seller would still earn zeroeconomic profit.If he pays no rent then the accounting cost of using the building is zero,but there is still an opportunity cost, which represents the value of the next best alternative use ofthe building. c.Does the seller who pays no rent have an incentive to lower the price he charges for the vacuum cleaner? No he has o to chargea ower price lower his price for that good.By charging a lower price,the firm is no longer maximizing profit 二、EXERCISES 1.The data in the following table give information about the price (in dollars) for which a firm can sell a unit of output and the total cost of production. a.Fill in the blanks in the table
increased output? Will your answer change if the government imposes a price ceiling? If demand increases with fixed supply, price and profits increase. The price increase induces the firms in the industry to increase output. Also, with positive profit, firms enter the industry, shifting the supply curve to the right. This results in a new equilibrium with a higher quantity produced and a price that earns all firms zero economic profit. With an effective price ceiling, profit will be lower than without the ceiling, reducing the incentive for firms to enter the industry. With zero economic profit, no firms enter and there is no shift in the supply curve. 13. The government passes a law that allows a substantial subsidy for every acre of land used to grow tobacco. How does this program affect the long-run supply curve for tobacco? A subsidy on tobacco production decreases the firm’s costs of production. These cost decreases encourage other firms to enter tobacco production, and the supply curve for the industry shifts out to the right 14. A certain brand of vacuum cleaners can be purchased from several local stores as well as from several catalogue or web site sources. a. If all sellers charge the same price for the vacuum cleaner, will they all earn zero economic profit in the long run? Yes by charging the same price they will all earn zero economic profit in the long run. If economic profit was greater than zero then firms would enter the industry and if economic profit was less than zero firms would exit the industry. b. If all sellers charge the same price and one local seller owns the building in which he does business, paying no rent, is this seller earning a positive economic profit? No this seller would still earn zero economic profit. If he pays no rent then the accounting cost of using the building is zero, but there is still an opportunity cost, which represents the value of the next best alternative use of the building. c. Does the seller who pays no rent have an incentive to lower the price he charges for the vacuum cleaner? No he has no incentive to charge a lower price because this will lower his economic profit. Given all firms sell an identical good, they will charge the same price for that good. By charging a lower price, the firm is no longer maximizing profit. 二、EXERCISES 1. The data in the following table give information about the price (in dollars) for which a firm can sell a unit of output and the total cost of production. a. Fill in the blanks in the table
b.Show what happens to the firm's output choice and profit if the price of the product falls from $60 to $50. Q P TR TC MR TR MR P=60 P=60 P=60P=50P=50P=50 060 100 1 60 150 60 178 3 60 198 60 212 6 230 60 272 8 0 35 60 410 476 The table below shows the firm's revenue and cost for the two prices 心 MR MR P=60 P=60 P=50 P=50P=50 0 60 0 10 00 100 150 50 60 0 50 100 2 60 120 178 58 28 100 180 198 1 50 4 240 212 28 2 300 230 18 250 6 60 360 250 110 20 50 50 0 420 272 148 350 8 480 310 170 50 90 60 540 355 1 45 60 450 50 10 6 600 410 190 6的 500 50 90 1160 G60 475 185 60 550 50 At a price of $60,the firm should produce ten units of output to maximize profit because this is the point cbsest to where price equals marginal cost without having marginal cost exceed price.At a price of $50.the firm should produce nine units to maximize profit. Whe n price falls from $60 to$50.profit falls from $190 to$95. what happ s to the firm's II t of production then to
b. Show what happens to the firm’s output choice and profit if the price of the product falls from $60 to $50. Q P TR P = 60 TC P = 60 MC MR P = 60 TR P = 50 MR P = 50 P = 50 0 60 100 1 60 150 2 60 178 3 60 198 4 60 212 5 60 230 6 60 250 7 60 272 8 60 310 9 60 355 10 60 410 11 60 475 The table below shows the firm’s revenue and cost for the two prices. Q P TR P = 60 TC P = 60 MC MR P = 60 TR P = 50 MR P = 50 P = 50 0 60 0 100 -100 _ _ 0 _ -100 1 60 60 150 -90 50 60 50 50 -100 2 60 120 178 -58 28 60 100 50 -78 3 60 180 198 -18 20 60 150 50 -48 4 60 240 212 28 14 60 200 50 -12 5 60 300 230 70 18 60 250 50 20 6 60 360 250 110 20 60 300 50 50 7 60 420 272 148 22 60 350 50 78 8 60 480 310 170 38 60 400 50 90 9 60 540 355 185 45 60 450 50 95 10 60 600 410 190 55 60 500 50 90 11 60 660 475 185 65 60 550 50 75 At a price of $60, the firm should produce ten units of output to maximize profit because this is the point closest to where price equals marginal cost without having marginal cost exceed price. At a price of $50, the firm should produce nine units to maximize profit. When price falls from $60 to $50, profit falls from $190 to $95. 2. Using the data in the table, show what happens to the firm’s output choice and profit if the fixed cost of production increases from $100 to $150, and then to
$200.Assume that the price of the output remains at $60 per unit.What general conclusion can you reach about the effects of fixed costs on the firm's output choice? The table bebw shows the firm's revenue and cost fiwed cos FCof 100,150and200 In all of the given cases,with fixed cost equal to 100,then 150,and then 200,the firm will produce 10 units of output because this is the point closest to where price equals marginal cost without having niuencetheoptimalqu tity,h arginal cost.Highe fixed costs also result in lower profits Q P TR TC TC TC FC= FC=150FC=150 FC=200 FC=200 100 100 0 60 0 100 -100 150 -150 200 200 1 -90 50 200 -140 250 -190 2 60 120 178 58 28 228 4108 278 -158 GO 180 20 248 298 -118 4 240 212 2 262 312 -72 60 300 2 70 18 20 6 360 250 110 3 350 10 % 420 1 98 3 60 170 3 360 120 410 540 1 1 1 190 5 460 140 510 60 185 525 135 676 3.Use the same information as in Exercise 1
$200. Assume that the price of the output remains at $60 per unit. What general conclusion can you reach about the effects of fixed costs on the firm’s output choice? The table below shows the firm’s revenue and cost information for fixed cost, FC of 100, 150, and 200. In all of the given cases, with fixed cost equal to 100, then 150, and then 200, the firm will produce 10 units of output because this is the point closest to where price equals marginal cost without having marginal cost exceed price. Fixed costs do not influence the optimal quantity, because they do not influence marginal cost. Higher fixed costs also result in lower profits. Q P TR TC FC = 100 FC = 100 MC TC FC = 150 FC = 150 TC FC = 200 FC = 200 0 60 0 100 -100 _ 150 -150 200 -200 1 60 60 150 -90 50 200 -140 250 -190 2 60 120 178 -58 28 228 -108 278 -158 3 60 180 198 -18 20 248 -68 298 -118 4 60 240 212 28 14 262 -22 312 -72 5 60 300 230 70 18 280 20 330 -30 6 60 360 250 110 20 300 60 350 10 7 60 420 272 148 22 322 98 372 48 8 60 480 310 170 38 360 120 410 70 9 60 540 355 185 45 405 135 455 85 10 60 600 410 190 55 460 140 510 90 11 60 660 475 185 65 525 135 575 85 3. Use the same information as in Exercise 1
a.Derive the firm's short-run supply curve.(Hint:you may want to plot the appropriate cost curves.) The firm's short cost.The table average variable cost.The firm will produce 8 or more units depending on the market price and will not produce in the 0-7 units of output range because in this range AVC is greater than MC.When AVC is greater than MC.the firm minimizes losse by producing nothing. Q TC MC TVC TFC AVC 0 100 0 100 160 50 100 50.0 2 178 78 100 390 3456 204 11 S 28 890 0 散油新 0000 475 65 375 34.1
a. Derive the firm’s short-run supply curve. (Hint: you may want to plot the appropriate cost curves.) The firm’s short-run supply curve is its marginal cost curve above average variable cost. The table below lists marginal cost, total cost, variable cost, fixed cost, and average variable cost. The firm will produce 8 or more units depending on the market price and will not produce in the 0-7 units of output range because in this range AVC is greater than MC. When AVC is greater than MC, the firm minimizes losses by producing nothing. Q TC MC TVC TFC AVC 0 100 100 _ 0 100 _ 1 150 50 50 100 50.0 2 178 28 78 100 39.0 3 198 20 98 100 32.7 4 212 14 112 100 28.0 5 230 18 130 100 26.0 6 250 20 150 100 25.0 7 272 22 172 100 24.6 8 310 38 210 100 26.3 9 355 45 255 100 28.3 10 410 55 310 100 31.0 11 475 65 375 100 34.1
b.If 100 identical firms are in the market,what is the industry supply curve? For 100 firms with identical cost structures.the market supply curve is the horizontal summation ofeach firm's output at each price. 800
b. If 100 identical firms are in the market, what is the industry supply curve? For 100 firms with identical cost structures, the market supply curve is the horizontal summation of each firm’s output at each price. 800 60 Q P S
4.Suppose you are the manager of a watchmaking firm operating in a Your cost of production is given by C=200+2where q evand Cistotal osThe maga ot ofproductio The fixed cost of production is $200.) a.If the price of watches is $100,how many watches should you produce to maximize profit? Profits are maximized where marginal cost is equal to marginal revenue Here,marginal revenue is equal to $100;recall that price equals margina revenue in a competitive market: 100=4q,orq=25 b.What will the profit levelbe? Profit isequaltototal revenue minus total cost π=(100)25)-(200+2*253=$1050. c.At what minimum price will the firm produce a positive output? variable costs.Remember that the firm's short-run supply curve is its marginal cos curve above the minimum of average variable cost.Here,average variable cost is V℃_2q2 =2g.Also,MC is equal to 4q.So.MC is greater than AVC for any quantity greater than 0.This means that the firm produces in the short run as ng as price is positive. 5.Suppose that a competitive firm's marginal cost of producing output q is given by MC(q)=3+2g.Assume that the market price of the firm's product is s9. a.What level ofoutputwill the firm produce? ginal cost Given the fact that thisfirm is oper ting narket,the mark et price faces is equal to marginal revenue.Thus,the firm should set the market price equal to marginal cost to maximize its profits: 9=3+2q,orq=3. b.What is the firm's producersurplus? Producer surplus is equal to the area below the market price,i.e.$9.00,and above the marginal cost curve,ie.,3+2q.Because MC is linear,producer surplus is a triangle with a base equal to S6(9-3=6).The beight ofthe triangle is 3.where P=MC. Therefore,producer surplusi 0.5063)=s9
4. Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost of production is given by C = 200 +2 q2 , where q is the level of output and C is total cost. (The marginal cost of production is 4q. The fixed cost of production is $200.) a. If the price of watches is $100, how many watches should you produce to maximize profit? Profits are maximized where marginal cost is equal to marginal revenue. Here, marginal revenue is equal to $100; recall that price equals marginal revenue in a competitive market: 100 = 4q, or q = 25. b. What will the profit level be? Profit is equal to total revenue minus total cost: = (100)(25) - (200 + 2*252 ) = $1050. c. At what minimum price will the firm produce a positive output? A firm will produce in the short run if the revenues it receives are greater than its variable costs. Remember that the firm’s short-run supply curve is its marginal cost curve above the minimum of average variable cost. Here, average variable cost is VC q = 2q 2 q = 2q . Also, MC is equal to 4q. So, MC is greater than AVC for any quantity greater than 0. This means that the firm produces in the short run as long as price is positive. 5. Suppose that a competitive firm’s marginal cost of producing output q is given by MC(q) = 3 + 2q. Assume that the market price of the firm’s product is $9. a. What level of output will the firm produce? To maximize profits, the firm should set marginal revenue equal to marginal cost. Given the fact that this firm is operating in a competitive market, the market price it faces is equal to marginal revenue. Thus, the firm should set the market price equal to marginal cost to maximize its profits: 9 = 3 + 2q, or q = 3. b. What is the firm’s producer surplus? Producer surplus is equal to the area below the market price, i.e., $9.00, and above the marginal cost curve, i.e., 3 + 2q. Because MC is linear, producer surplus is a triangle with a base equal to $6 (9 - 3 = 6). The height of the triangle is 3, where P = MC. Therefore, producer surplus is (0.5)(6)(3) = $9
Price MC(q)=3+2g 10- 0 P=9.00 2 1 2 3 4 Quantity Suppose that the average variable cost of the firm is given by AVC(=3+q that the firm's fixed costs ar earning a positive,negative,or zero profit in the short Will the firm be Profit is equal to total revenue minus total ost.Total cost is equal to total variable cost plus fixed cost.Total variable cost is equal to (AVC)(q).Therefre,at q=3. TVC=3+33)=$18. Fixed cost is equal to $3.Therefore,total costequals TVCplus TFC,or TC=18+3=$21. Total revenue is price times quantity: TR=(893)=$27. Profit is total revenue minus total cost: π=S27.S21=S6 Thefore,the firm is earning positive economic profits.More easily,you might recall that surplus mi producer surplus was $9 in part b,profit equals 9-3 or $6. 6.A firm produces a product in a competitive industry and has a total cost function TC=50+4g+2g2 and a marginal cost function MC=4+4g.At the given market price of $20,the firm is producing 5 units of output.Is the firm maximizing profit? What quantity of output should the firm produce in the long run?
Price Quantity 1 2 3 4 5 6 7 8 9 10 1 2 3 4 MC(q) = 3 + 2q Producer’s Surplus P = $9.00 Producer c. Suppose that the average variable cost of the firm is given by AVC(q) = 3 + q. Suppose that the firm’s fixed costs are known to be $3. Will the firm be earning a positive, negative, or zero profit in the short run? Profit is equal to total revenue minus total cost. Total cost is equal to total variable cost plus fixed cost. Total variable cost is equal to (AVC)(q). Therefore, at q = 3, TVC = (3 + 3)(3) = $18. Fixed cost is equal to $3. Therefore, total cost equals TVC plus TFC, or TC = 18 + 3 = $21. Total revenue is price times quantity: TR = ($9)(3) = $27. Profit is total revenue minus total cost: = $27 - $21 = $6. Therefore, the firm is earning positive economic profits. More easily, you might recall that profit equals producer surplus minus fixed cost. Since we found that producer surplus was $9 in part b, profit equals 9-3 or $6. 6. A firm produces a product in a competitive industry and has a total cost function TC = 50 + 4q + 2q 2 and a marginal cost function MC = 4 + 4q . At the given market price of $20, the firm is producing 5 units of output. Is the firm maximizing profit? What quantity of output should the firm produce in the long run?