Profit Maximization and Shutdown Point (numerical example) A group of economists surveyed small business firms in July 2020 to find out about their production decisions during the beginning of the pandemic. Suppose a small business from their survey has the following information on output and costs. Output q 0 1 2345 Total Cost Marginal Cost Total Revenue (a) (b) P=$14 10 21 30 41 54 69 Marginal Revenue Profit=TR- TC (d) a) Calculate the MC, TR and MR and profits in Table 1 if the firm's product is $14 per unit. b) Is the marginal revenue changing? What is the economic reason for your answer? c) Given the price is $14, how much q should a firm produce to maximizes profits? What is the economic reason a firm does not produce more units? d) If a firm is making economic losses, it will produce or shutdown to minimize its losses (which is equivalent to maximizing profits). Theoretically, at what price will the firm shut down? 1 e) Calculate the firm's shutdown price. How many units will it produce? f) If the price is $12, would you expect the firm to produce or shut down? Briefly explain. What are the firm's economic profits (losses) if it decides to produce? What are its economic profits (losses) if it decides to shut down? Does this support your explanation? g) If the price fell below the price in (e) what should the firm do? Briefly explain.
Profit Maximization and Shutdown Point (numerical example) A group of economists surveyed small business firms in July 2020 to find out about their production decisions during the beginning of the pandemic. Suppose a small business from their survey has the following information on output and costs. Output q 0 1 2345 Total Cost Marginal Cost Total Revenue (a) (b) P=$14 10 21 30 41 54 69 Marginal Revenue Profit=TR- TC (d) a) Calculate the MC, TR and MR and profits in Table 1 if the firm's product is $14 per unit. b) Is the marginal revenue changing? What is the economic reason for your answer? c) Given the price is $14, how much q should a firm produce to maximizes profits? What is the economic reason a firm does not produce more units? d) If a firm is making economic losses, it will produce or shutdown to minimize its losses (which is equivalent to maximizing profits). Theoretically, at what price will the firm shut down? 1 e) Calculate the firm's shutdown price. How many units will it produce? f) If the price is $12, would you expect the firm to produce or shut down? Briefly explain. What are the firm's economic profits (losses) if it decides to produce? What are its economic profits (losses) if it decides to shut down? Does this support your explanation? g) If the price fell below the price in (e) what should the firm do? Briefly explain.
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Please only solve parts d, e, and f.
Transcribed Image Text:1. Profit Maximization and Shutdown Point (numerical example)
A group of economists surveyed small business firms in July 2020 to find out about their
production decisions during the beginning of the pandemic. Suppose a small business
from their survey has the following information on output and costs.
Output q
0
1
2
3
4
5
Total Cost Marginal Cost Total Revenue
(a)
(b) P=$14
10
21
30
41
54
69
Marginal
Revenue
Profit=TR-
TC (d)
a) Calculate the MC, TR and MR and profits in Table 1 if the firm's product is $14 per
unit.
b) Is the marginal revenue changing? What is the economic reason for your answer?
c) Given the price is $14, how much q should a firm produce to maximizes profits?
What is the economic reason a firm does not produce more units?
d) If a firm is making economic losses, it will produce or shutdown to minimize its
losses (which is equivalent to maximizing profits). Theoretically, at what price will
the firm shut down?
1
e) Calculate the firm's shutdown price. How many units will it produce?
f) If the price is $12, would you expect the firm to produce or shut down? Briefly
explain. What are the firm's economic profits (losses) if it decides to produce? What
are its economic profits (losses) if it decides to shut down? Does this support your
explanation?
g) If the price fell below the price in (e) what should the firm do? Briefly explain.
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