Question

Q (in units)	AFC (in dollars)	AVC (in dollars)	MC (in dollars)
0	-----	-----	-----
2	2.5	18	10
4	1.25	14	14
6	0.83	18	42
8	0.63	30	94
10	0.50	50	170

The table above shows the cost schedules of a perfectly competitive firm. If the market price of output is $50, the firm will produce _____ units and earn a profit of _____ .  

(Hint: ATC = AFC + AVC.)

a.	6; $187.02
b.	6; $48.00
c.	8; $154.96
d.	8; $245.04
e.	10; $0.00

Answer 1

The correct answer is (a) 6; $187.02

In order to maximize profit a firm produces that quantity at which MR = MC and if MR is not equal to MC then it produces that quantity at which MR is greater and closest to MC.

TR(Total Revenue) = PQ = 50Q

MR = dTR/dQ = 50 for all Quantity(Q)

We can see from the above table that there is no Q for which MR = MC. Hence we have to find Quantity(Q) at which MR is greater and closest to MC.

We can see from the above table that MR is greater and closest to MC for quantity(Q) = 6 units.

Note At 6 units MC = 42 and at 8 units MC = 84 and MR = 50 for all Q)

Hence amount of output produced = 6 units.

Profit = TR - TC and TC = ATC*Q. Here ATC = AVC + AFC = 0.83 + 18 = 18.83 and Q = 6.

Hence TC = 18.83*6 = 112.98

TR = PQ = 50*6 = 300.

Hence Profit = TR - TC = 300 - 112.98

= $187.02.

Hence the correct answer is (a) 6; $187.02