Question

Assume the following cost data are for a purely competitive producer:

Total Product	Fixed Cost	Variable Cost	Total Cost	Average Fixed Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0	$80	$0	$80
1	$80	$60	$140	$80.00	$60.00	$140.00	$60.00
2	$80	$115	$195	$40.00	$57.50	$97.50	$55.00
3	$80	$165	$245	$26.67	$55.00	$81.67	$50.00
4	$80	$210	$290	$20.00	$52.50	$72.50	$45.00
5	$80	$260	$340	$16.00	$52.00	$68.00	$50.00
6	$80	$315	$395	$13.33	$52.50	$65.83	$55.00
7	$80	$375	$455	$11.43	$53.57	$65.00	$60.00
8	$80	$445	$525	$10.00	$55.63	$65.63	$70.00
9	$80	$525	$605	$8.89	$58.33	$67.22	$80.00
10	$80	$615	$695	$8.00	$61.50	$69.50	$90.00

At a product price of $70,

Will this firm produce in the short run?

If it is preferable to produce, what will be the profit‑maximizing or loss‑minimizing output?

What economic profit or loss will the firm realize?

Answer parts i, ii, and iii of question #1 assuming product price is $60.

c.   Answer parts i, ii, and iii of question #1 assuming product price is $50.

Answer 1

At Price = 70, the firm should produce minimum 5 units, as then, average cost per unit becomes lesser than the price, and we can make profit

Average total cost is minimized at 7 units, and hence profit is maximum here.

Economic profit = 7*(60-65) = $35

At Price = 60, firm can produce till 9 units in short run, as average variable cost is being recovered.

Since Average variable cost is minimum at 5 units, loss is minimzed here.

Loss here = (60-68)*5 = -$40

at Price = $50, even variable costs are not being covered and hence, no production should take place.