Answer to Question #255117 in Microeconomics for Mejay

Question

Mondi Company produces party boxes that are sold in bundles of 1000 boxes. The market is highly competitive with boxes currently selling for R100 per thousand. The company has a total and marginal cost curve given by: TC= 3 000 000+0.001Q² MC= 0.002Q Q is measured in thousand boxes bundles per year a) Determine Mondi's profit maximizing quantity? b) Calculate if the firm is earning a profit or loss? c) Based on the analysis above, should Mondi Company operate or shut down in the shortrun?

Answer 1

(a)

$TC=3,000,000+0.001Q^2$

$MC=0.002Q$

$TR=P\times Q$

$=100Q$

$MR=100$

At profit maximizing quantity:

$MC=MR$

$0.002Q=100$

$Q=50,000.$

(b)

$TR=100\times50,000=5,000,000$

$TC=3,000,000+0.001(50,000^2).$

$=25,003,000,000$

Profit/Loss $=TR -TC$

$=5,000,000 - 25,003,000,000$

$=-20,003,000,000.$

Thus, the firm is earning a loss.

(c)

In the short run, the firm should shut down because from the analysis, it is not earning revenue to cover its variable costs.