Study the diagram below carefully and use the given information to answer the questions that follow:
(a) Determine: (i) the profit maximizing output; (ii) the firm’s profit if it produces 600 units of output; (iii) the total cost if the firm produces 400 units.
(b) Calculate the (I) total revenue (ii) profit of the firm at the output level of 900 units
(c) What will happen if a firm’s market price falls below its average variable cost?
Explanation
(a)(i) Profit-maximizing output level is 900 because at this output level MC = MR
(ii) TR =$10x600 -$6,000
TC = $6 x 600 = $3,600
Profit = TR -TC -S 2, 400
(iii)TC =ATC xQ
$10 x 400 = $4,000
(b)(i) TR =P x Q = $10 x 900 = $9,000
(ii) At 900 units TR -TC
TC = $8 x 900 = $7,200
Profit =$1800
(c) At any time price (AR) is below the average variable cost, TR will be less than TVC and operating profit will be negative, that is, there will be loss on operation. The firm will eventually close down.