Answer to Question #283425 in Economics of Enterprise for mer

Question

Assume a wheat producing farmer engaging in selling its product under perfect competition market faces cost functions as TC= Q3 -2Q2 +8Q and Average revenue of the farmer is given as Birr 8 . Having this information, A) Determine the optimal level of output and price in the short run. B) Calculate the economic profit (loss) the farmer will obtain (incur

Answer 1

Solution:

A.). Optimal level of output is where MR = MC:

Under perfect competition = AR = MR = 8

MC = $\frac{\partial TC} {\partial Q}$ = 3Q² – 4Q + 8

8 = 3Q² – 4Q + 8

Q = 1.33

The optimal level of output in the short-run is = 1.33

Price = 8

 

B.). Economic profit = TR – TC

TR = P $\times$ Q = 8 $\times$ 1.33 = 10.64

TC = Q³ -2Q² +8Q = 1.33³ – 2(1.33²) + 8(1.33) = 2.353 – 3.538 + 10.64 = 9.46

Economic Profit = 10.64 – 9.46 = 1.18