Question

1) A perfectly competitive firm that sells fish has a marginal cost function given by MC = 3q. The market has determined a price of P = 60. How many fish will this firm produce?

2)See the previous question about the perfectly competitive fish firm. Suppose that at this level of output, the firm has average costs of production of ATC = 42. How much total economic profit will the firm earn?

3) A perfectly competitive firm will shut down in the short run if

P > minimum ATC

P = minimum ATC

P > minimum AVC and P < minimum ATC

P < minimum AVC

4) Suppose a perfectly competitive firm has a total cost function of TC = 2q² + 5q + 128.

Therefore, the firm’s marginal cost function is MC = 4q + 5.

What is the break-even price for this firm?

Answer 1

1) Use P = MC or 60 = 3q. This gives q = 20. Hence, the firm produces 20 fishes

2) When q is 20, average costs of production of ATC = 42. Economic profit = (60 - 42)*20 = $360

3) A perfectly competitive firm will shut down in the short run if P < minimum AVC

4) ATC = TC/q = 2q + 5 + 128/q and marginal cost function is MC = 4q + 5.

At the break-even price for this firm, P = MC = AC

2q + 5 + 128/q = 4q + 5

128/q = 2q

q = 64^0.5

= 8

Hence break even price is 4*8 + 5 = $37.