Ryan Capistrano

AC181

1. The accompanying graph (top of next page) summarizes the demand

and costs for a firm that operates in a perfectly competitive market.
a. What level of output should this firm produce in the short run?
 7 units, the marginal cost should equal to the marginal revenue.

b. What price should this firm charge in the short run?

 $28, the market price per unit that the firm should charge.

c. What is the firm’s total cost at this level of output?

 $224, Total cost = Average total cost x output. = 32 x 7 = 224.

d. What is the firm’s total variable cost at this level of output?

 $98, Total variable cost = Average Variable cost x output = 14 x 7 = 98.

e. What is the firm’s fixed cost at this level of output?

 $126, Total Fixed Cost = Average Fixed cost x output = 18 x 7
= 126.

f. What is the firm’s profit if it produces this level of output?

 $28, Total Profit = Total Revenue – Total Cost. (Price x
Output) – Total Cost. (28x7) – 224 = 196-224 = -28.

g. What is the firm’s profit if it shuts down?

 -$126, will be equal to its fixed cost.

h. In the long run, should this firm continue to operate or shut down?
 Exit the market or shutdown.
2. A firm sells its product in a perfectly competitive market where other
firms charge a price of $80 per unit. The firm’s total costs are C(Q) 40
8Q 2Q2.

a. How much output should the firm produce in the short run?
 20 units
P = MC
90 = 10 + 4Q
4Q = 90 -10
4Q = 80
Q = 20

b. What price should the firm charge in the short run?

 $90

c. What are the firm’s short-run profits?

 $750
R = (90)(20)
= 1800
C = 50 + (10)(20) + 2(20)^2
= 1050
Profit = Revenue – Cost
P = 1800 – 1050
P = 750

d. What adjustments should be anticipated in the long run?

 The plan should be reducing its output because market profit will shrink to zero due
to the entries of market competitors in the long run.
3. The accompanying graph (bottom of this page) summarizes the
demand and costs for a firm that operates in a monopolistically
competitive market.

a. What is the firm optimal output?

 7 units, Marginal cost is equal to the Marginal Revenue as they intercept in the
graph.

b. What is the firm optimal price?

 $130, optimal output and optimal price is determined where MC = MR.

c. What are the firm’s maximum profits?

 $140,
(130-110) x 7
= 20 x 7
= 140
d. What adjustments should the manager be anticipating?
 The manager should anticipate that the demand will decrease in the long run
because of multiple entries in the market. The economic profit will shrink to zero