Case ?Define costs of different types and their relationship to profits.
Identify the key economic concepts influencing production.
Understand the characteristics of a perfectly competitive firm.
Discussion Identify the key economic concepts influencing production.
1.The following table gives short-run and long-run total costs for various levels of output for a perfectly competitive firm:
|
Output (Q)
|
SRTC
|
AVC
|
TR
|
|
0
|
350
|
|
|
|
1
|
400
|
|
|
|
2
|
425
|
|
|
|
3
|
465
|
|
|
|
4
|
505
|
|
|
|
5
|
560
|
|
|
|
6
|
635
|
|
|
|
7
|
730
|
|
|
Note: AVC is Average Variable Cost
TR is Total Revenue
SRTC is Short Run Total Cost
SRTC = FC + VC (Total Cost = Fixed Cost + Variable Costs)
Please see background material for additional formulas.
a. Suppose the fixed cost (FC) of production is $350 and Price (P) is $55, complete the table above. (Cut and paste the table into a separate document).
b. Suppose you are producing 2 units of output (Q = 2), if you want to produce one extra unit of output (Q = 3), what would be the marginal cost?
c. If the market price is given as $55, how much output will the perfectly competitive firm produce to maximize profits?
d. Calculate the profit or loss.
e. Should the firm always shut down in the short run when it experiences a loss? Explain.