Chapter 59, Problem 2FRQ

a)

To determine

Short-run profit maximization output level.

Answer to Problem 2FRQ

6 output level is the firm’s profit maximization level of output.

Explanation of Solution

At the 6 output level, marginal cost equates to price and marginal cost is rising so this would be the firm’s profit maximization output level.

Economics Concept Introduction

Introduction:

In the short run, the firm will maximize its profit where the marginal cost curve cuts marginal revenue or price line. And the difference between average total cost and marginal cost is the profit.

b)

To determine

Calculation of total revenue.

Answer to Problem 2FRQ

Total revenue =$120

Explanation of Solution

Total Revenue = Price×Quantity Total Revenue = $20×6

Total Revenue = $120

Economics Concept Introduction

Introduction:

Total revenue is the product of the total output produced and the price charged. It is calculated by

Total Revenue = Price×Quantity

c)

To determine

Determining total cost

Answer to Problem 2FRQ

Total Cost = $177

Explanation of Solution

Total Cost = Average total cost×output

Total Cost = $29.5×6

Total Cost = $177

Economics Concept Introduction

Introduction:

Total cost is the cost of output produced. It is calculated by Total Cost = Average total cost×output

d)

To determine

Determining the firm’s profit or loss.

Answer to Problem 2FRQ

If there is also a fall in the demand for physical books, it can result in following a change in the price of e-books which are also substitutes, and can result in a decrease in the prices.

Explanation of Solution

Total Revenue = $120 Total Cost = $177

Total cost > Total revenue

Loss = Total cost-Total revenue Loss = $177-$120

Loss = $57

Economics Concept Introduction

Introduction:

When total revenue exceeds total cost then the firm earns a profit and when the total cost exceeds the total revenue. It can be calculated by

Profit = Total Revenue-Total cost Loss = Total cost-Total revenue

e)

To determine

Short-run operating in the market.

Answer to Problem 2FRQ

The firm will not produce in the short run.

Explanation of Solution

The firm’s average variable cost is $22 Firm charge price is $20

Average variable cost > Price

Here, the average variable cost is greater than the price so the firm is not able to cover AVC. Hence, the firm

will not produce in the short run.

Economics Concept Introduction

Introduction:

In the short run, the firm will operate only when it covers at least the average variable cost which means to operate price should be greater than the average variable cost. If a firm is not able to cover the average variable cost it will drive out of the market.