Cost And Revenue

Full Answer Section

2. Graphing Cost Curves and MR:

• Plot the MC, ATC, AVC, and AFC curves on a graph with quantity (Q) on the x-axis and cost on the y-axis.
• Draw the horizontal MR curve at the market price level.

3. Finding Profit-Maximizing Price and Output:

• Identify the output level where MR equals MC. This is the profit-maximizing quantity.
• The profit-maximizing price is the market price (P).

4. Calculating Profit or Loss:

• Profit = Total Revenue (TR) - Total Cost (TC)
• TR = P * Q

5. Determining Shutdown Decision (Price Drop to $10):

• If the price falls below the minimum average variable cost (AVC), the firm should shut down temporarily. This is because it cannot even cover its variable costs, let alone contribute to fixed costs.
• Compare the price of $10 to the minimum AVC from your calculations to decide.

6. Addressing Zero Economic Profit:

• In perfect competition, zero economic profit in the long run means firms earn just enough to cover their opportunity costs (including normal profit).
• Firms stay in business because:
  • They earn normal profit, which is the minimum return required to keep entrepreneurs engaged.
  • Exiting the market might involve costs (e.g., breaking contracts, selling assets at a loss).
  • They might anticipate future economic profits due to changes in market conditions or technological advancements

Sample Solution

1. Filling in Missing Values:

• Marginal Cost (MC): Calculate the change in total cost (TC) divided by the change in quantity (Q) for each successive output level.
• Marginal Revenue (MR): In perfect competition, MR equals the market price (P), which is constant for any quantity sold.
• Average Fixed Cost (AFC): Divide total fixed cost (TFC) by quantity (Q).
• Average Variable Cost (AVC): Divide total variable cost (TVC) by quantity (Q).
• Average Total Cost (ATC): Divide total cost (TC) by quantity (Q).