Question

1. You open a perfectly competitive firm making sandwiches, with the given quantity and total cost schedules. Fill in the missing columns, and then determine your level of output and amount of profit you will earn if the price of sandwiches is a) $7; b) $5.80; c) $4.20; and d) $2.

Quantity	Total Costs	Variable Costs	Average Total Costs	Average Variable Costs	Marginal Costs
0	30		----	----	----
5	45
10	55
15	76
20	105
25	140
30	185

quantity, total costs, variable costs, average total costs, average variable costs, and marginal costs are what the columns are in that order

Answer 1

Q	TC	FC	VC=TC-FC	ATC=TC/Q	AVC=VC/Q	MC=(Change in TC/Change in Q)
0	30	30	0	-	-	-
5	45	30	15	9	3	3
10	55	30	25	5.5	2.5	2
15	76	30	46	5.07	3.07	4.2
20	105	30	75	5.25	3.75	5.8
25	140	30	110	5.6	4.4	7
30	185	30	155	6.17	5.17	9

Optimal condition for output under perfectly competitive market is P=MC.

(a) When P=$7 , then optimal output = 25 units.

Profit = TR-TC= (P)(Q)- TC

= (7)(25)- 140 = $35

(b) When P=$5.80, then optimal output = 20 units.

Profit = TR-TC= (P)(Q)- TC

= (5.80)(20)- 105

= $11

(c) When P=$4.20 , optimal output = 15 units

Profit = TR-TC = (P)(Q)- TC

= (4.20)(15)- 76

= -$13 (i.e loss).

(d) When P=$2 , then P=MC at Q= 10 units.

We can see that at this level of output , P<ATC and P<AVC , so the firm would not produce and shut down in the short run . The loss is equal to the amount of fixed cost.

Loss = -$30.