Purchase Solution

Calculating the per unit profit/loss at given price levels

Not what you're looking for?

Ask Custom Question

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

Output Marginal Cost Average Variable Cost Average Total Cost
0
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.

Attachments
Purchase this Solution
Solution Summary

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

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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Calculating Breakeven Point and Profits

    287424 Calculating Breakeven Point and Profits The fixed costs at Harley Motors are $1 million annually. The main product has revenue of $8.50 per unit and $4.25 variable cost. Determine the following.

  • Determining profit maximizing output level

    (b) What is the Average Profit or Loss for the firm? Average profit per unit= P-ATC=$3.5-$2.5=$1.0 per unit (c) What is the Total Profit or Loss for the firm?

  • Determining output and profit of prefectly competitive firm

    units Equilibrium output of each firm =10500/1500=7 units Profit/loss per unit at this level=(P-ATC)=$46-47.14=-$1.14 Profit/loss per firm at this level=(P-ATC)*output=($46-47.14)*7=-$7.98 Since the firms are making loss in short run, some

  • Calculating BEP, operating and financial leverage

    Degree of operating leverage is given by Q=quantity, P=Price, V =variable cost per unit, F=Fixed costs DOL at 20000 bags=5.00 DOL at 25000 bags=2.78 As the quantity sold increases, total contribution is increased.

  • Calculating BEP, operating and financial leverage

    Degree of operating leverage is given by Q=quantity, P=Price, V =variable cost per unit, F=Fixed costs DOL at 20000 bags=5.00 DOL at 25000 bags=2.78 As the quantity sold increases, total contribution is increased

  • Break even point and operating leverage

    The average selling price of its finished product is $180 per unit. The variable cost for the same units is $126. Allison radio incurs fixed cost of $540,000 per year. a) What is the break-even point in units for the company?

  • What is the break-even point, profit, leverage, combined leverage for Healthy Foods, Inc.

    Degree of operating leverage is given by Q=quantity, P=Price, V =variable cost per unit, F=Fixed costs DOL at 20000 bags=5.00 DOL at 25000 bags=2.78 As the quantity sold increases, total contribution is increased.

  • Calculating a competitive industry's long-run equilibrium

    If that price ends up being the market price and if the normal rate of profit is 10%, then how big will each firm's accounting profit per unit be?

  • Calculating profit-maximizing price and output

    Calculate the profit-maximizing price, output, and total profit contribution levels. 2. Calculate point price elasticities of demand for each customer product at the activity levels identified in part A. 1.

  • Findind break even sales

    What is the dollar sales volume the firm must achieve in order to reach the break-even point? c. What would be the firm's profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units? d.

View More Related Solutions