Please answer the 3 following questions: Choose the correct answer and discuss w
ID: 1158978 • Letter: P
Question
Please answer the 3 following questions:
Choose the correct answer and discuss why that answer is correct.
1- Assume a certain firm is producing 1,000 units of output (so q = 1,000). At q = 1,000, the firm’s marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. At q = 1,000, what is the firm’s profit?
a) -$200
b) $1000
c) $3000
d) $4000
2- Continue with the previous question. To maximize its profit, what should the firm do?
a) It should shut down.
b) It should decrease its output, but continue to produce.
c) It should continue to produce 1000 units.
d) It should increase its output.
3- Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20,000 from her savings (which paid 3 percent interest per year) and borrowed $30,000 from her uncle, to whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She asked Louis, an accountant, and Greg, an economist, to calculate her profit for her. What did they say?
a) Louis said her profit was $34,100 and Greg said she lost $6,500.
b) Louis said her profit was $34,100 and Greg said her profit was $6,500.
c) Louis said her profit was $35,000 and Greg said she lost $5,000.
d) Louis said her profit was $33,500 and Greg said her profit was $33,500.
Explanation / Answer
Profit= Total Revenue (TR) – Total Cost (TC)
Total revenue = Q x P
Price per unit (P)=$12
Quantity (Q)=1000
TR= $12 x 1000= $12,000
AC= TC/X
TC=Average cost (AC)=$11, so TC= $11 x 1000= $11,000
Profit = TR- TC= $12,000 - $11,000= $1,000 (b)
2. To maximize its profit, what should the firm do?
Marginal revenue (MR) should equal Marginal costs (MC) for profit maximization for a perfectly competitive firm.
MR= P for a competitive firm
MR= $ 12 and MC=$15.
The firm should cut back on the production since the cost of producing one more unit is greater than the cost of revenue from one more unit. Choice B.
3. Accounting profit is total revenue minus explicit costs.
TR= $60,000
Explicit costs are those that require monetary outflow
Interest payments to Uncle :
$30000 @ 3% p.a.=$900
Cost of ingredients=$25,000
Implicit or opportunity costs do not require actual monetary payments. Implicit costs are opportunity costs. Opportunity cost is the value of the next best alternative.
Own salary foregone= $40,000 per year
Interest on own savings 3% on $20,000=$600
Total implicit costs = $40,600
Profit = Revenue – (Explicit costs + Implicit costs)
=$60,000 – ($25,900 + $40,600)
= $60,000 -$66,500= -$6,500 (loss).
Choice A.