8-8 A firm’s cost curves are given in the following table.

q TC TFC TVC AVC ATC MC

0 $100 $100 - - - -
1 130 100 - - - -
2 150 100 - - - -
3 160 100 - - - -
4 172 100 - - - -
5 185 100 - - - -
6 210 100 - - - -
7 240 100 - - - -
8 280 100 - - - -
9 330 100 - - - -
1
0 390 100 - - - -

a. Complete the table

b. Graph AVC, ATC, and MC on the same graph. What is the relationship between the MC curve and
the ATC and between MC and AVC?
c. Suppose market price is $30. How much will the firm produce in the short run? How much are
total profits?
d. Suppose market price is $50. How much will the firm produce in the short run? What are total
profits?

Solution:

a. The table will be populated using the formula below:

TVC = TC – TFC
AVC = TVC / q
ATC = TC / q
MC = ∆TC/∆q

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 b. Using Excel graphing function, below is the graph of AVC,ATC, and MC:

Firm's Cost Curve

140.00
120.00
100.00
80.00
COSTS 60.00
40.00
20.00
-
1 2 3 4 5 6 7 8 9 10
Quantity Demand

AVC - ATC - MC -

Relationship of MC and ATC curve:

 The slope of curve ATC is negative (downward) as long as the curve MC is below its line.
It doesn’t matter if the slope of curve MC is positive or negative. (it is observable from
q=0 up to q=7.2
 The slope of ATC starts to turn positive (upward) when the curve MC intersected on it. (it
happened on the point between q=7 and q=8 which is also the minimum point of curve
ATC)

Relationship of MC and AVC curve:

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  The slope of curve AVC is negative (downward) as long as the curve MC is below its line.
It doesn’t matter if the slope of curve MC is positive or negative. (it is observable from
q=0 up to q=5.2
 The slope of AVC starts to turn positive (upward) when the curve MC intersected on it.
(it happened on the point between q=5 and q=6 which is also the minimum point of
curve AVC)

c. To get the revenue and profit of the firm at a market price of $30, three new columns will be
added to the table as indicated below:

Table Observations:

 The profit column in all values of q are all negatives (it means that the firm will generate a
loss at any given q)
 MC became equal to P(MR) at q=7 (this is the point that should supposedly maximize the
profit)
 The values of ATC (average total cost) is always above the value of P which is $30 (it means
that the market value of $30 will not be enough to cover the average total cost at any given
q)

To analyze graphically, below is the plotted value of MC, MR, and MC:

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 Profit-Maximizing Level @P=$30
140.00
120.00
100.00
80.00
Price per unit 60.00
40.00
20.00
0.00
1 2 3 4 5 6 7 8 9 10
Units of output

ATC MC P=MR

Graphical Observations:

 Curve ATC is always above the line P (Cost is always greater than Revenue in any value of q)
 Curve MC intersected the line P at q=7 (this is the point that should supposedly maximize
the profit)
 Curve MC intersected the curve ATC at point between q=8 and q=9 (this is the point where
ATC starts to increase and have a positive slope)

Conclusion:

Given the above observation, we can say that the firm will not be able to generate any profit at
any given q. Hence it is not advisable for the firm to sell its product at the value of $30. The primary
reason for this is that the revenue will never be greater than the cost at any given q. What the firm can
do in this scenario is either increase the price or stop entering the business at all.

d. To get the revenue and profit of the firm at a market price of $50, we just changed the value of P
from $30 to $50 as indicated below:

Table observations:

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  MC became equal to P(MR) at q=9 (this is the point that will maximize the profit)
 $120 is the highest profit that the firm can have at $50 market price
 The $120 profit has been generated in both q=8 and q=9
 Total revenue at q=8 is 400 while total revenue at q=9 is 450

To analyze graphically, below is the plotted value of MC, MR, and MC:

Profit-Maximizing Level @P=$50

140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00
1 2 3 4 5 6 7 8 9 10
ATC MC P=MR

Graphical Observations:

 Curve ATC intersected line P at the point between q=3 and q=4 (This is the break even point
of the firm and the point where positive profit starts to increase)
 Curve MC intersected the line P at q=9 (this is the point that would maximize the profit)
 Curve MC intersected the curve ATC at point between q=8 and q=9 (this is the point where
ATC starts to increase and have a positive slope)

Conclusion:

 At a market price of $50, the firm will start generating profit at q=4.
 The maximum profit that the firm could generate is $120 at a total revenue of $450. Even
though the profit of $120 can be obtained at q=8 and the profit that will be generated will
just be negated by the cost, it is still more advisable to continue the production up to q=9 as
it will generate a greater cash flow on the firm. In addition, the rule of thumb is to increase
production until it reaches the profit maximizing level or the point when MC=MR.

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