If the firm is maximizing profit.then price will be equal to marginal cost. P=MC results in P=204+MC.or4 The firm is maximizing profit since it is producing too much output.The current level of profit is profit=20*5-(60+4*5+2*5*5)=-20 and the profit maximizing levelis profit=20*4-(60+4*4+2*4*0=-18 Given no change in the price of the product or the cost structure of the firm,the firm should produce q=0 units of output in the long run since at the quantity where price is equal to marginal cost,economic profit is negative.The firm should exit the industry. 7.Suppose the cost function is C(q)=4q2+16. a.Find variable co fixed cos,average cosav verage variable cost,and average fixed cost.Hint:Marginal cost is MC=8q Variable cost is that part of total cost that dependsonand fixed cost is that part oftotal cost that does not depend onq(16) b.Show the average cost,marginal cost,and average variable cost curves on a graph. Average cost is u-shaped.Average cost is relatively large at first because the rm is notable to spread the fixed units of output.As output increases average fixed costs will fall relatively rapidly Average cost wil increase at some point because the average fixed cost will become very small and average variable cost is increasing as q increases.Average variable cost will increase because of diminishing returns to the variable factor labor.MC and AVC are linear,and both pass through the origin.Average variable cost is cost.Marginal cost is everyw avera t.If the average is rising.then the marginal must be above the average.Marginal cost will hit average cost at its minimum point. c.Find the output that minimizes average cost. The minimum average cost quantity is where MC is equal to AC At what range of prices will the firm produce a positive output? The firm will supply positive levels ofoutput as long as P=MC>AVC.or as long as the firm is covering its variable costs of production.In this case,marginal cost severywhere above average variable cost so the firm will supply positive output at any positive price d.At what range of prices will the firm earn a negative profit? If the firm is maximizing profit, then price will be equal to marginal cost. P=MC results in P=20=4+4q=MC, or q=4. The firm is not maximizing profit, since it is producing too much output. The current level of profit is profit = 20*5-(50+4*5+2*5*5) = –20, and the profit maximizing level is profit = 20*4-(50+4*4+2*4*4) = –18. Given no change in the price of the product or the cost structure of the firm, the firm should produce q=0 units of output in the long run since at the quantity where price is equal to marginal cost, economic profit is negative. The firm should exit the industry. 7. Suppose the cost function is C(q)=4q2+16. a. Find variable cost, fixed cost, average cost, average variable cost, and average fixed cost. Hint: Marginal cost is MC=8q. Variable cost is that part of total cost that depends on q () and fixed cost is that part of total cost that does not depend on q (16). b. Show the average cost, marginal cost, and average variable cost curves on a graph. Average cost is u-shaped. Average cost is relatively large at first because the firm is not able to spread the fixed cost over very many units of output. As output increases, average fixed costs will fall relatively rapidly. Average cost will increase at some point because the average fixed cost will become very small and average variable cost is increasing as q increases. Average variable cost will increase because of diminishing returns to the variable factor labor. MC and AVC are linear, and both pass through the origin. Average variable cost is everywhere below average cost. Marginal cost is everywhere above average variable cost. If the average is rising, then the marginal must be above the average. Marginal cost will hit average cost at its minimum point. c. Find the output that minimizes average cost. The minimum average cost quantity is where MC is equal to AC: At what range of prices will the firm produce a positive output? The firm will supply positive levels of output as long as P=MC>AVC, or as long as the firm is covering its variable costs of production. In this case, marginal cost is everywhere above average variable cost so the firm will supply positive output at any positive price. d. At what range of prices will the firm earn a negative profit?