Question

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

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 ?

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

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