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