Question

. The table below illustrates the quantity of output (in units) and total cost (TC, in MYR) for a perfectly competitive firm that can sell its output at MYR 9 per unit.

Quantity	TC	TVC	ATC	AVC	MC	TR	MR	Profit /Loss
0	3	0	-	-	-	0	-	-3
1	6
2	12
3	21
4	33
5	49

a. Calculate the total variable cost (TVC), average total cost (ATC), average variable cost (AVC), marginal cost (MC), total revenue (TR), marginal revenue (MR) and profit or loss at every levels of quantity. Fill in the blank entries. Show your calculations.

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b. Determine the profit maximizing level of output and the amount of economic profit the firm is making at current price of MYR 9.

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c. Determine whether the firm will produce or not in the short run, given the following price levels. Calculate the amount of profit or loss at each level.

1. At a market product price of MYR 3.

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2. At a market product price of MYR 16.

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[Total: 15 marks]

Answer 1

Quantity	Fixed Cost	Variable Cost	Total Cost	Average Variable Cost	Average Total Cost	Marginal Cost	Price	Total Revenue	Marginal Revenue	Profit/Loss
0	3	0	3	--	--	--	9	0	--	-3
1	3	3	6	3	6	3	9	9	9	3
2	3	9	12	4.5	6	6	9	18	9	6
3	3	18	21	6	7	9	9	27	9	6
4	3	30	33	7.5	8.25	12	9	36	9	3
5	3	46	49	9.2	9.8	16	9	45	9	-4

Total Cost = Fixed Cost + Variable Cost

At 0 units, variable cost is always zero so from the above formula fixed cost will be 3. Fixed cost will remain same at every quantity.

Variable Cost = Total Cost - Fixed Cost

Average Variable Cost = Variable Cost / Quantity

Average Total Cost = Total Cost / Quantity

Marginal Cost = Change in Total Cost / Change in Quantity

Total Revenue = Price x Quantity

Marginal Revenue = Change in Total Revenue / Change in Quantity

Profit = Total Revenue - Total Cost

B) Profit is maximized where marginal revenue and marginal cost both are equal. Now in case of perfect competition price and marginal revenue both are equal always so, we can say that in perfect competition profit is maximized where P = MC

Hence at a price of 9, profit is maximized at 3 units because at 3 units, price and marginal cost both are equal.

So the profit-maximizing output is 3 units and profit at this quantity is 6.

C) At a market price of 3, the firm will produce where P = MC. So the firm will produce 1 unit.

A firm shut's down when it is not able to cover its average variable cost from price.

So in this case at 1 unit, AVC is 3 and the price is 3 hence the price is able to cover the AVC so it should continue to produce.

D) At a market price of 16, the firm will produce where P = MC. So the firm will produce 5 units.

A firm shut's down when it is not able to cover its average variable cost from price.

So in this case at 5 units, AVC is 9.2 and the price is 16 hence the price is able to cover the AVC so it should continue to produce.