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Calculating the per unit profit/loss at given price levels

Suppose a competitive firm's cost information is as shown in the table below.

Output Marginal Cost Average Variable Cost Average Total Cost
1 $ 8.00 $ 8.00 $ 17.00
2 7.00 7.50 12.00
3 6.00 7.00 10.00
4 5.00 6.50 8.75
5 6.00 6.40 8.20
6 7.00 6.50 8.00
7 8.00 6.71 8.00
8 9.00 7.00 8.13
9 10.00 7.33 8.33
10 11.00 7.70 8.60

a. Suppose the firm sells its output for $9.10. What is the firm's marginal revenue (MR)? Explain.
b. Compare MR to marginal cost (MC) to determine the firm's profit maximizing (loss-minimizing) output level. Be sure to check whether or not the firm should shut down. Show all work & explain your answers well.
c. What is the firm's per-unit profit (loss) and total profit (loss) at this output level? Show all your work.
d. Repeat parts a. through c. assuming the price has fallen to $7.10.
e. Repeat again assuming the price has fallen to $6.10.
f. At what price does the firm earn a normal profit? Explain.
g. At what price must this firm shut down? Explain.

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Solution Preview

a) A competitive firm's marginal revenue is equal to market price. So, Marginal Revenue is $9.10

b) A competitive firm chooses its output level such that marginal revenue is less than or equal to marginal cost. In the given case, any output above 8 units will make marginal cost higher than the marginal revenue i.e. $9.10.
So, firm can choose the output level of 8 units. At this output level, AVC is lower than the price, firm should continue to operate at ...

Solution Summary

Solution describes the steps to calculate the marginal revenue output level and per unit profit/loss.