Question

QUESTION 30

Figure 16-2. The figure is drawn for a monopolistically competitive firm.

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A graph of Price, P, versus Quantity, Q, shows a straight line, M R, decreasing linearly, a second straight line, Demand, decreasing linearly above M R at a slower rate, and a third straight line, M C, increasing linearly. 4 horizontal lines extend from points on P, as follows, from lowest to highest price. P = 16, P = 24, P = 32, and P = 36. 3 vertical lines extend from points on Q, as follows, from smallest to largest quantity. Q = 24, Q = 32, and Q = 48. P = 36 and Q = 24 meet at a point on Demand before the intersection of M C and Demand. P = 32 and Q = 32 meet at the intersection of M C and Demand. P = 24 and Q = 24 meet at the intersection of M C and M R. P = 24 and Q = 48 meet at a point on Demand after the intersection of M C and Demand. P = 16 and Q = 32 meet at a point on M R after the intersection of M C and M R.

Refer to Figure 16-2. If the average variable cost is $26 at the profit-maximizing quantity, and if the firm’s profit is $40 at that quantity, then its fixed costs amount to
    a.   $200.
   b.   $152.
   c.   $12.
   d.   $240.

Answer 1

Please, give me a rating. It will be appreciable. Thank you.

Refer to Figure, explained by you. For a Monopolist profit-maximizing quantity will be at the intersection of MR and MC curves which is at Q = 24

P = 36 and Q = 24 meet at a point on Demand before the intersection of MC and Demand. Hence profit-maximizing price will be at P = 36

we know that =>

Profit = TR - TC ----------------(1)

TR = P*Q = 36*24 = 864

TC = TVC = TFC

TVC = AVC * Q

Since, AVC = 26

TVC = 26 * 24 = 624

From equation (1)

Profit = TR - ( TVC +TFC )

40 = 864 - 624 - TFC

TFC = 864 - 624 -40

TFC = 200

So, TFC will be $200.

Option a) is correct.