ECO 2010 INCLUSIVE ACCESS
ECO 2010 INCLUSIVE ACCESS
21st Edition
ISBN: 9781260564624
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
Question
Book Icon
Chapter 10, Problem 4P

Sub part (a):

To determine

Calculation of economic profit.

Sub part (a):

Expert Solution
Check Mark

Explanation of Solution

Table -1 shows the data for the purely competitive producer

Table -1

Quantity Average fixed cost Average variable cost Average total cost Marginal cost
1 60 45 105
2 30 42.5 72.5 45
3 20 40 60 35
4 15 37.5 52 30
5 12 37 49 35
6 10 37.50 47.5 40
7 8.57 38.57 47.14 45
8 7.5 40.63 48.13 55
9 6.67 43.33 50 65
10 6 46.5 52.5 75

A profit maximizing firm produces output at the point where the marginal revenue equals to or greater than the marginal cost. Marginal revenue is equal to the price. At the price of $56, the marginal revenue is just greater than the marginal cost at the output level of 8 units. Thus, the profit maximizing output level is 8 units. At this point, the average variable cost is less than the price. Thus, the firm is operating in the short run.

Economic profit can be calculated as follows:

Economic profit=(Price×Quantity)(Average total cost×Quantity)=(56×8)(48.13×8)=448385.04=62.96

The economic profit is $62.96.

Economics Concept Introduction

Concept introduction:

Accounting profit: Accounting profit refers to the total revenue minus total explicit cost

Economic profit: Economic profit refers to the total revenue minus implicit and explicit cost.

Sub part (b):

To determine

Calculation of economic profit.

Sub part (b):

Expert Solution
Check Mark

Explanation of Solution

At the price of $41, the marginal revenue is greater than the marginal cost at the output level of 6 units. Thus, the profit maximizing output level is 6 units. At this point, the average variable cost is less than the price. Thus, the firm is operating in the short run.

Economic profit can be calculated as follows:

Economic profit=(Price×Quantity)(Average total cost×Quantity)=(41×6)(47.5×6)=246285=39

The economic profit is -$39.

Economics Concept Introduction

Concept introduction:

Accounting profit: Accounting profit refers to the total revenue minus total explicit cost

Economic profit: Economic profit refers to the total revenue minus implicit and explicit cost.

Sub part (c):

To determine

Shutdown decision.

Sub part (c):

Expert Solution
Check Mark

Explanation of Solution

At the price of $32, the marginal revenue is greater than the marginal cost at the output level of 4 units. Thus, the profit maximizing output level is 8 units. At this point, the average variable cost ($37.5) is greater than the price. Thus, the firm will shutdown at this price. The firm’s economic loss is at the fixed cost $60.

Economics Concept Introduction

Concept introduction:

Pure competition: Perfect competition refers to the market structure featuring more number of sellers and buyers in the market where the firm can sell the homogenous products.

Profit maximizing output: Profit maximizing output occur at the point where the marginal revenue and marginal cost intersect each other.

Shutdown point: In the short run, a firm shuts down at the point where the price of goods is less than the average variable cost.

Sub part (d):

To determine

Average variable cost and profit maximization.

Sub part (d):

Expert Solution
Check Mark

Explanation of Solution

Output at the price $26 is zero since the marginal revenue is less than the marginal cost at all the output levels.

Profit can be calculated by using the following formula.

Profit=(Price×Quantity)Fixed cost(Average variable cost×Quantity) (1)

Substitute the respective values in equation (1) to calculate the profit at the price $26.

Profit=(26×0)60(0×0)=60

Thus, profit is -$60.

Quantity supply can be calculated by using the following formula.

Quantity=QuantityIndividual firm×Total number of firm (2)

Substitute the respective values in equation (2) to calculate the total supply for 1,500 firms.

Quantity=0×1,500=0

Total supply at price $26 is 0 units.

Table -2 shows the output level obtained by using profit maximization condition (MRMC) . Also, it shows the profit or loss and the quantity supply that obtained by using the equations (1) and (2).

Table -2

Price Quantity supplied for a single firm Profit or loss Quantity supplied for 1,500 firms
26 0 -60 0
32 0 -60 0
38 5 -55 7,500
41 6 -39 9,000
46 7 -7.98 10,500
56 8 62.96 12,000
66 9 144 13,500
Economics Concept Introduction

Concept introduction:

Pure competition: Perfect competition refers to the market structure featuring more number of sellers and buyers in the market where the firm can sell the homogenous products.

Profit maximizing output: Profit maximizing output occur at the point where the marginal revenue and marginal cost intersect each other.

Shutdown point: In the short run, a firm shuts down at the point where the price of goods is less than the average variable cost.

Sub part (e):

To determine

Supply schedule.

Sub part (e):

Expert Solution
Check Mark

Explanation of Solution

Supply schedule refers to the total supply of the industry at different price levels. This can be derived from the Table -2, where column 1is price and column 4 is supply. This is given in the Table -3.

Table -3

Price Quantity supply
26 0
32 0
38 7,500
41 9,000
46 10,500
56 12,000
66 13,500
Economics Concept Introduction

Concept introduction:

Supply schedule: Supply schedule refers to the table that shows the availability of supply at different price level.

Sub part (f):

To determine

Scenario for contraction in the production.

Sub part (f):

Expert Solution
Check Mark

Explanation of Solution

Table -4 shows the demand and supply schedule.

Table -4

Price Quantity demanded Quantity supply
26 17,000 0
32 15,000 0
38 13,500 7,500
41 12,000 9,000
46 10,500 10,500
56 9,500 12,000
66 8,000 13,500

In Table -4, the market is in equilibrium at the point where the demand and supply is equal (10,500 units) at the price level $46. Thus, equilibrium price is $46 and equilibrium quantity is $10,500. Thus, the individual firm’s output is 7 (10,5001500) units. Profit is -$7.14 (4647.14) per firm. Since there is a loss, in the firm, there would be a contraction in the long run till it reaches a normal profit.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Problem Set#8 Part I You are the manager of a firm producing a good in a particular market environment. The following table details the price charged (P) and the total cost (TC) incurred by your firm at various production levels (Q). Price (P) $125 Quantity (Q) Total Cost (TC) 0 150 125 1 175 125 2 210 125 3 255 125 4 310 125 5 375 125 6 450 125 7 535 125 8 630 125 9 735 125 10 850 125 11 975 125 12 1,110 125 13 1,255 125 14 1,410 125 15 1,575 1. Based on the information provided in the table above, identify the type of market structure in which the firm operates. Explain your reasoning! 2. Add seven columns to the table above, one for each of the following variables: AFC, ATC, VC, AVC, MC, TR, and MR
The table below presents the demand schedule and marginal costs facing a monopolist producer. a. Fill in the total revenue and marginal revenue columns. Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Leave no cells blank. Enter 0 if appropriate. Q 0 P ($) 8 TR ($) 0 MR ($) MC ($) 1 7 2 6 3 5 1 2 3 4 4 4 5 5 3 6 6 2 7 1 8 0 b. What is the profit-maximizing level of output? units c. What price will the monopolist charge to maximize profits? $ 7 8
not use ai please
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Principles of Microeconomics
Economics
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Microeconomic Theory
Economics
ISBN:9781337517942
Author:NICHOLSON
Publisher:Cengage
Text book image
Economics:
Economics
ISBN:9781285859460
Author:BOYES, William
Publisher:Cengage Learning
Text book image
Microeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Text book image
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning