Question

Suppose that a paper market is perfectly competitive. A profit-maximizing competitive firm in this market has marginal cost of $5, profit of $100 and 50 units of paper. (a) Compute total revenue and total cost (10 points). (b) Suppose that the firm has variable cost of $50. Compute the average variable cost and fixed cost.

Answer 1

A)A profit maximizing perfectly competitive firm produces at the point where market price = MC. If MC = $5 at the profit maximizing quantity, that means market price = $5. So, total revenue = price * quantity = $(5*50) = $250.

Profit = total revenue - total cost = $100.

If TR = $250, then TC = TR - profit = $(250 - 100) = $150.

B) If total variable cost = $50, then average variable cost = TVC/quantity = $(50/50) = $1.

Fixed cost = Total cost - total variable cost = $(150 - 50) = $100