Sub part (a):
Calculation of economic profit.
Sub part (a):
Explanation of Solution
Table -1 shows the data for the purely competitive producer
Table -1
Quantity | Average fixed cost | Marginal cost | ||
1 | 60 | 45 | 105 | |
2 | 30 | 42.5 | 72.5 | 45 |
3 | 20 | 40 | 60 | 35 |
4 | 15 | 37.5 | 52 | 30 |
5 | 12 | 37 | 49 | 35 |
6 | 10 | 37.50 | 47.5 | 40 |
7 | 8.57 | 38.57 | 47.14 | 45 |
8 | 7.5 | 40.63 | 48.13 | 55 |
9 | 6.67 | 43.33 | 50 | 65 |
10 | 6 | 46.5 | 52.5 | 75 |
A profit maximizing firm produces output at the point where the marginal revenue equals to or greater than the marginal cost. Marginal revenue is equal to the
Economic profit can be calculated as follows:
The economic profit is $62.96.
Concept introduction:
Accounting profit: Accounting profit refers to the total revenue minus total explicit cost
Economic profit: Economic profit refers to the total revenue minus implicit and explicit cost.
Sub part (b):
Calculation of economic profit.
Sub part (b):
Explanation of Solution
At the price of $41, the marginal revenue is greater than the marginal cost at the output level of 6 units. Thus, the profit maximizing output level is 6 units. At this point, the average variable cost is less than the price. Thus, the firm is operating in the short run.
Economic profit can be calculated as follows:
The economic profit is -$39.
Concept introduction:
Accounting profit: Accounting profit refers to the total revenue minus total explicit cost
Economic profit: Economic profit refers to the total revenue minus implicit and explicit cost.
Sub part (c):
Shutdown decision.
Sub part (c):
Explanation of Solution
At the price of $32, the marginal revenue is greater than the marginal cost at the output level of 4 units. Thus, the profit maximizing output level is 8 units. At this point, the average variable cost ($37.5) is greater than the price. Thus, the firm will shutdown at this price. The firm’s economic loss is at the fixed cost $60.
Concept introduction:
Pure competition:
Profit maximizing output: Profit maximizing output occur at the point where the marginal revenue and marginal cost intersect each other.
Shutdown point: In the short run, a firm shuts down at the point where the price of goods is less than the average variable cost.
Sub part (d):
Average variable cost and profit maximization.
Sub part (d):
Explanation of Solution
Output at the price $26 is zero since the marginal revenue is less than the marginal cost at all the output levels.
Profit can be calculated by using the following formula.
Substitute the respective values in equation (1) to calculate the profit at the price $26.
Thus, profit is -$60.
Quantity supply can be calculated by using the following formula.
Substitute the respective values in equation (2) to calculate the total supply for 1,500 firms.
Total supply at price $26 is 0 units.
Table -2 shows the output level obtained by using profit maximization condition
Table -2
Price | Quantity supplied for a single firm | Profit or loss | Quantity supplied for 1,500 firms |
26 | 0 | -60 | 0 |
32 | 0 | -60 | 0 |
38 | 5 | -55 | 7,500 |
41 | 6 | -39 | 9,000 |
46 | 7 | -7.98 | 10,500 |
56 | 8 | 62.96 | 12,000 |
66 | 9 | 144 | 13,500 |
Concept introduction:
Pure competition: Perfect competition refers to the market structure featuring more number of sellers and buyers in the market where the firm can sell the homogenous products.
Profit maximizing output: Profit maximizing output occur at the point where the marginal revenue and marginal cost intersect each other.
Shutdown point: In the short run, a firm shuts down at the point where the price of goods is less than the average variable cost.
Sub part (e):
Supply schedule.
Sub part (e):
Explanation of Solution
Supply schedule refers to the total supply of the industry at different price levels. This can be derived from the Table -2, where column 1is price and column 4 is supply. This is given in the Table -3.
Table -3
Price | Quantity supply |
26 | 0 |
32 | 0 |
38 | 7,500 |
41 | 9,000 |
46 | 10,500 |
56 | 12,000 |
66 | 13,500 |
Concept introduction:
Supply schedule: Supply schedule refers to the table that shows the availability of supply at different price level.
Sub part (f):
Scenario for contraction in the production.
Sub part (f):
Explanation of Solution
Table -4 shows the demand and supply schedule.
Table -4
Price | Quantity demanded | Quantity supply |
26 | 17,000 | 0 |
32 | 15,000 | 0 |
38 | 13,500 | 7,500 |
41 | 12,000 | 9,000 |
46 | 10,500 | 10,500 |
56 | 9,500 | 12,000 |
66 | 8,000 | 13,500 |
In Table -4, the market is in equilibrium at the point where the demand and supply is equal (10,500 units) at the price level $46. Thus,
Want to see more full solutions like this?
Chapter 10 Solutions
AP ECONOMICS 2018-FOCUS REVIEW GUIDE
- 8. Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, sales taxes, and rental payments on leased office machinery. LO4arrow_forward6.Which of the following are short-run and which are long-run adjustments? LO3 a.Wendy’s builds a new restaurant. b.Harley-Davidson Corporation hires 200 more production workers. c.A farmer increases the amount of fertilizer used on his corn crop. d.An Alcoa aluminum plant adds a third shift of workers.arrow_forwardIn the short run, the marginal cost of the first unit of output is $25, the marginal cost of producing producing the third unit of output is $14. The firm's total variable cost of producing three units of O a. $39. O b. $25 O c. $33.. O d. $57.arrow_forward
- Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Linda’s accounting profit is while her economic profit is. LO9.1 a. $700; $400 b. $300; $100 c. $300; negative $100 d. $1,000; negative $1,100arrow_forwardSuppose you are a perfectly competitive firm producing computer memory chips. Your production capacityis 1000 units per year. Your marginal cost is $10 per chip up to capacity. You have a fixed cost of $10,000 ifproduction is positive and $0 if you shut down. What are your profit-maximizing levels of production andprofit if the market price is ( a ) $5 per chip, ( b ) $15 per chip, and ( c ) $25 per chip? For case ( b ), explainwhy production is positive even though profits are negative?arrow_forwardQuantity Price 0 20 1 18 2 16 3 14 4 12 5 10 Are the price and quantity combinations above for a perfectly competitive industry? Select one: O a. No, they are not because the demand curve should be perfectly elastic. O b. No, because the quantities are too low. O c. Yes, they are because the demand curve is downward sloping. O d. Yes, they are because the price falls the same amount for each increase in quantity. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- Suppose that each firm in a competitive industry has the following costs: Total cost: TC = 50 + q2 Marginal cost: MC = q where q is an individual firms quantity produced. The market demand curve for this product is Demand:QD = 120 P where P is the price and Q is the total quantity of the good. Currently, there are 9 firms in the market. a. What is each firms fixed cost? What is its variable cost? Give the equation for average total cost. b. Graph average-total-cost curve and the marginal-cost curve for q from 5 to 15. At what quantity is average-total-cost curve at its minimum? What is marginal cost and average total cost at that quantity? c Give the equation for each firms supply curve. d. Give the equation for the market supply curve for the short run in which the number of firms is fixed. e. What is the equilibrium price and quantity for this market in the short run? f. In this equilibrium, how much does each firm produce? Calculate each firms profit or loss. Is there incentive for firms to enter or exit? g. In the long run with free entry and exit, what is the equilibrium price and quantity in this market? h. In this long-run equilibrium, how much does each firm produce? How many firms are in the market?arrow_forwardSuppose that bicycles are produced by a perfectly competitive, constant-cost industryWhich of the following will have a larger effect the long-run price of bicycles: a government program to advertise the health benefits of bicyclingor (2) a government program increases the demand for steel, an input in the manufacture of bicycles that is produced in an increasing cost industry ? O. Option 1: shifts the demand curve out and increases the price. O. Option 2: shifts the supply curve up and increases the price O. Option 2: it shifts the demand curve up and increases the quantity. O. Option 2: shifts the supply curve up and increases the quantity.arrow_forwardSuppose that low-skilled workers employed in clearing woodland can each clear one acre per month if each is equipped with a shovel, a machete, and a chainsaw. Clearing one acre brings in $1,000 in revenue. Each worker’s equipment costs the worker’s employer $150 per month to rent and each worker toils 40 hours per week for four weeks each month. LO17.6 Now consider the employer’s total costs. These include the equipment costs as well as a normal profit of $50 per acre. If the firm pays workers the minimum wage of $6.20 per hour, what will the firm’s economic profit or loss be per acre? At what value would the minimum wage have to be set so that the firm would make zero economic profit from employing an additional low-skilled worker to clear woodland?arrow_forward
- 5. Consider the marginal revenue and marginal cost curves shown in Figure 7.13. Assume that the firm represented is able to cover its variable costs if it operates in the short run. What is the firm's optimal output level? a. 150 units b. 80 units c. 50 units d. less than 50 units e. between 50 and 80 units Choose and explain your answer above thoroughly--graphical, algebraically, numerically.arrow_forwardThe market demand for a type of good has been estimated as: P= 40 - 0.25Q, where Pis price ($) and Q is rate of sales per month. The long run market supply is expressed as: P 10.0 + 0.05Q. %3D There is a firm operating in this market that is characterized by following long run marginal cost: MC = - 20.0 + 5.0q What would be the return to firm specific advantage for this firm? O. 66.24 O. 44.15 O. 82.5 O. 33.72 O. 14.75 O. 54.25 O. 62.17arrow_forwardA small firm operating in a purely competitive market has fixed costs of $45 per day compensates each employee $96 per day and has daily input and raw material costs as indicated in the table below. A. What would be the profit maximizing level of production if demand increased such that each unit sold for $130?, will the company make an economic profit producing this quantity of output? b: suppose the demand significantly decreased so that price for a unit of ouput sold to $115 each. What should the firm do? Why?arrow_forward
- Essentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage Learning