THE PROBLEM BELOW IS DUE FOR HOMEWORK ON THURSDAY, MARCH 11
NAME _________________________________________
The following short-run cost functions are for a perfectly competitive firm that produces
gadgets:
QUANTITY OF
GADGETS
(Q)
300
400
500
600
700
800
900
a.
b.
AVERAGE
TOTAL COST
(ATC)
5.00
4.00
3.40
3.083333
3.00
3.0625
4.00
AVERAGE
VARIABLE COST
(AVC)
3.666666
3.00
2.60
2.416666
2.428571
2.5625
3.555555
MARGINAL
COST
(MC)
2.00
1.00
1.00
1.50
2.50
3.50
11.50
Find the firm’s TOTAL FIXED COSTS? (If you get a number with a
decimal place, round to the nearest whole number). EXPLAIN YOUR
REASONING AND SHOW CALCULATIONS.
(4 points)
For each of the following market prices, find:
 The profit-maximizing (loss-minimizing) level of output
 The total economic profit that will be earned at the profitmaximizing level of output.
SHOW ALL CALCULATIONS AND EXPLAIN YOUR REASONING CLEARLY.
(21 points)
i.
Price = $3.50.
2
ii.
Price = $2.50.
iii.
Price = $1.50.
3
2.
Suppose that a perfectly competitive firm has the following diagram in the
short-run. Use this diagram for parts a, b, and c below.
$
MC
ATC
150
AVC
100
40
200
300
400
Q
a. If the price of the product is $150, how many units of output should the firm
produce? Explain your reasoning briefly. Is total economic profit greater than,
less than, or equal to zero and how can you tell (no numerical calculation is
possible).
(5 points)
4
b. If the price of the product is $100, how many units of output should the firm
produce? Explain your reasoning briefly. Is total economic profit greater than,
less than, or equal to zero and how can you tell (no numerical calculation is
possible).
(5 points)
c. If the price of the product is $40, how many units of output should the firm
produce? Explain your reasoning briefly. Is total economic profit greater than,
less than, or equal to zero and how can you tell (no numerical calculation is
possible).
(5 points)