Assume this firm is making a loss when it produces its 7th unit of output. What
ID: 1215494 • Letter: A
Question
Assume this firm is making a loss when it produces its 7th unit of output. What should the firm do in the short-run?
You will need this additional information to answer this question.
A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm’s product is $140.
Output FC VC TC TR Profit/Loss
0 $90 $ 0 _90__ __0_ _(90)__
1 90 90 __180_ _140__ _(40)__
2 90 170 _206__ _280__ _20__
3 90 290 _380__ _420__ _40__
4 90 430 _520__ _560__ 40___
5 90 590 _680__ _720__ _20__
6 90 770 _860__ _840__ _(20__
a. Complete the table.
b. What level of output should the firm produce to maximize profits?
The firm maximizes profits at 3 – 4 Units.
Explanation / Answer
(1) Table is completed and accurate.
(2) For perfectly competitive firms, profit is maximum when price = marginal cost (MC) where MC = Change in TC / Change in quantity.
In this case, Price = $140 = MC when Q = 4 (for which, MC = $520 - $380 = $140).
(3) At Q = 7, TR = 7 x $140 = $980. If Total variable costs is less than $980, the firm can continue operating in the short run since revenues will cover its variable expenses. But if variable costs are higher than $980, firm should shut down because revenue is insufficient to cover variable costs of operations.