Table below gives total cost of producing widgets for variable output levels:
Output: 0 1 2 3 4 5 6
Total Cost: 5 6 9 14 21 30 41
Marginal Cost: - 1 3 5 7 9 11
1) What are the firm's fixed production costs?
2) Draw a graph of total production costs vs. number of widgets.
3) Draw a graph of marginal cost of production vs. number of widgets.
4) Does the firm exhibit increasing or decreasing returns to scale?
5) If the selling price of each widget is $9, and the firm can sell as many widgets as it wants at that price, how many widgets should the firm make to maximize profit?
5) Draw a graph of marginal revenue (the increase in revenue from the sale of an additional unit) vs. number of widgets produced. Put widgets produced on the horizontal and marginal revenue on the vertical.
7) On the same axes as the marginal revenue graph you have just drawn, draw a graph of marginal cost vs. number of widgets. Plot marginal costs on the vertical. If the marginal revenue and marginal cost curves cross, what can you say about the point at which they cross?
8) Suppose the marginal revenue (or selling price) of widgets were to fall. What effect do you think that would have on the profit maximizing level of output? Illustrate you answer graphically.
9) Suppose the marginal revenue were to stay fixed at $9 a unit but the entire marginal cost curve shifts up. What effect do you think that would have on the profit maximizing level of output?
This solution determines the optimal output level with the help of suitable graphs.