Answer to Question #220692 in Microeconomics for Gilb

Question

Question One
You are given the following data concerning the production costs and the average revenue of a profit maximising firm that produces Good X. The fixed costs of production are K100.
Output of good X Short run average costs (AVC) Average Revenue (AR)
1 110 300
2 95 250
3 80 210
4 75 180
5 82 150
6 85 120
7 90 100
8 100 90
9 110 80
10 120 70

a) Given the table above, calculate Total Variable costs (TVC), Total Costs (TC), Marginal costs (MC, Marginal revenue (MR) and profit (loss) at each level of output. (insert extra columns in the table) (10 marks)
b) Determine the profit maximizing level of output. (1 mark)
c) Calculate the smallest rise in TVC that would force the firm to cease production in the short run. (3 marks)
d) Distinguish between the short run and long run periods of production. (6 marks)
Total: 20 marks

Answer 1

(a)

(b)

Profit maximizing level of output =1.

(c)

$240-190=50$

(d)

In the short run period, wages and other prices are sticky.

On the other hand, in the long run, full wage and price flexibility and market adjustment has been achieved so that the economy is at natural level of employment and potential output.