Question

Summarizes the demand and costs for a firm that operates in a perfectly competitive market.

a. What level of output should this firm produce in the short run?

b. What price should this firm charge in the short run?

c. What is the firm’s total cost at this level of output?

d. What is the firm’s total variable cost at this level of output?

e. What is the firm’s fixed cost at this level of output?

f. What is the firm’s profit if it produces this level of output?

g. What is the firm’s profit if it shuts down?

h. In the long run, should this firm continue to operate or shut down?

Short answer

a.The level of output that the firm should produce in the short run is .

b. This firm should charge a price of dollars in the short run.

c. The firm’s total cost at this level of output is $32.

d. The firm’s total variable cost at this level of output is $14.

e. The firm’s fixed cost at this level of output is $18.

f. The firm’s incurring loss due to an excess of ATC over the price.

g. If the firm shuts down, it will earn zero economic profit. Thefirm should continue to operate.

Step-by-step solution

Explanation for the first situation

a. In the short-run, the MC curve and the demand (MR) curve should be equal. So, in the shot-run, the firm should produce 7 units of quantity to equalize the MC curve with the demand (MR) curve.

Explanation for the second situation

b. In the short-run, the firm should charge a price of $28. At this point, the MC curve equals the demand curve.

Explanation for the third situation

c. At this level of output (a quantity of ), the firm has an average total cost (AC) of $32. So, the total cost (TC) at this level of output can be estimated as given below.

Thus, the total cost (TC) is $224.

Explanation for the fourth situation

d. At the level of a quantity of 7, the firm has an AVC of $14. So, the total variable cost (TVC) can be estimated as given below.

Thus, the total variable cost (TVC) is $98.

Explanation for the fifth situation

e. At the level of a quantity of , the firm has an AFC of $18. So, the total fixed cost (TFC) is estimated as given below.

Thus,the total fixed cost (TFC) is $126.

Explanation for the sixth situation

f. Thefirm is experiencing a loss in the short-run. This is because the average total cost (ATC) is greater than the price (P). The loss is estimated as given below.

Thus, the total loss in the short-run is $28.

Explanation for the seventh situation

g. If the firm shuts down, it won't earn any economic profit because it will realize a loss equal to the total fixed cost. In this case, the total fixed cost is $126.

Explanation for the eighth situation

h. While talking about the long-run, the firm should continue to operate because the price is greater than the average variable cost .