Question

Assume the following table represents cost for firms which produces key chains and want to maximize profits.

Output (Q)	MC	ATC	AVC	AFC
0	––	––	––	––
10	$3.01	$103.00	$3.00	$100.00
50	$2.00	$22.00	$2.00	$20.00
100	$4.00	$13.00	$3.00	$10.00
150	$8.00	$11.33	$4.67	$6.66
200	$11.01	$11.01	$6.01	$5.00
250	$14.00	$11.60	$7.60	$4.00
300	$18.00	$12.67	$9.34	$3.33
350	$22.00	$14.00	$11.14	$2.86

A) If the market price is $14, how many key chains should the firm produce ?

B) What is the firm’s total profits ?

C) If this is the typical firm in the industry, what will be the long run equilibrium price ?

Answer 1

a. Market price = 14$

The profit maximizing output level will be at point where MR or Price = MC curve

At output level of 250 units MC = Price = 14 $

So the firm will produce 250 units

b. Total profit = total revenue – total cost

= 3500 – 2900 = 600 $

Total revenue = Price * quantity = 14 * 250 = 3500

Total cost = ATC per unit * quantity = 11.60 * 250 = 2900

c. The long run equilibrium condition is at that point where Price = Min ATC

ATC is minimum at 11.01 $ where 200 units are produced. The price equals to ATC and the firm earn zero economic profit in long run