Question

Assume a firm's total cost curve can be represented as follows:                TC= 20q+ q^2 Assume...

Assume a firm's total cost curve can be represented as follows:

               TC= 20q+ q^2

Assume the market price for this good is $100 per unit.

A. At what output level is this firm earning 0 economic profits?

B. At this level of ouput, what is ATC?    What is AVC?      What is AFC?

C. At what output level is ATC at its minimum?

Homework Answers

Answer #1

TC= 20q+ q^2.  market price for this good is $100 per unit.

(a) For zero economic profits Total revenue=Total cost

Total Revenue=100q

Thus: 100q=20q+ q^2 or q(q-80)=0. Thus q=0,80. Thus at q=0 and q=80, the firm earns zero economic profits.

(b) ATC=TC/q=(20q+ q^2)/q=20+q

At q=80, ATC=20+80=100

Here AVC=ATC since there is no fixed cost in the total cost.

Hence at q=80, AVC=100 and AFC=0

(c) TC= 20q+ q^2

dTC/dq=20+2q

For minimization, we set dTC/dq=0 : 20+2q=0. SOlving we get q=-10. But since output cannot be negative, so the level of q at which TC is minimum is zero

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