Question 2
A perfectly competitive firm faces the short-run cost schedule shown in Table 1.
Output
Total Cost
12
1
20
2
26
3
32
Table 1
4
40
567
68
93
a) Calculate average total cost (ATC=TC/Q), marginal cost (MC=ATC/AQ) and marginal revenue (MR-ATR/AQ) for each level of output. The price per unit of output is £16.
[5 marks]
b) Plot ATC, MC and MR on a graph and mark the profit-maximising output. At what output is profit maximised?
[5 marks]
8
122
BUS108 (2021)
c) How much profit/loss is made at the optimum level of output?
Page 3
[5 marks]
d) Assume market price declines to £9 per unit. If the firm's average variable cost is £9.5, should the firm shut down in the short run? In the long run? Explain.
[5 marks]
e) If the firm is typical of other firms, what price will it charge in the long run? Explain.
[5 marks]
A perfectly competitive firm maximizes profit by prducing output at level where P = MC
Total Revenue = Price * Quantity
Marginal Revenue = Change in Total Revenue / Change in Quantity
Marginal Cost = Change in Total Cost / Change in Quantity
(a)
(b)
At output of 32 units P or MR > MC as 16 > 4.83
(c)
At 32 units of output
TR = 512
TC = 122
Maximum Profit
(d)For a firm to reach a point of shutdown, the condition is that the variable cost(average) must be equal/less than the price(revenue in average).
With the given data, the AR is at £9, which is the price. But the variable cost(average) is higher than this at £9.5. Thus, there is no need for a shutdown, at this point.
In the long run, if the variable cost(average) goes below £9.5 or the price does not rise, then a need for requirement might occur. But it can be avoided if the firm starts charging a price that is higher.
(e)The price in the long will be equal to the total cost(average) and also with the marginal cost.
Thus, in this case, it will be
Thus, a price of will be charged.
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