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Profit Maximizing Output for a Competitive Firm

Consider a firm in a perfectly competitive market. The firm has just built a plant that costs $15,000. Each unit of output
requires $5 worth of materials. Each worker costs $3 per hour.

a. Based on the information above, fill in the following table. (Refer to the attachment for proper formatting of this chart)

Number of Worker Hours - Output (Q) Fixed Cost (FC) Variable Cost (VC) Total Cost (TC) Marginal Cost (MC) Average Variable Cost (AVC) Average Total Cost (ATC)
0 0
25 100
50 150
75 175
100 195
125 205
150 210
175 212
200 213

b. If the market price is $12.50, how many units of output will the firm produce if it wants to maximize its profit or minimize its losses?

c. At the price, what is the firm's profit or loss?

d. If the firm is losing money, should it shut down or continue producing at a loss? Support your answer with numbers.

e. If as a result of a change in the market conditions the price increases to $80, how many units of output will the firm produce if it wants to maximize its profit or minimize its loss? How much is the profit or loss.

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Solution Preview

Please refer attached file for complete details and better clarity of tables and formulas.

Solution:

a. Based on the information above, fill in the following table.
L Output (Q) Fixed Cost (FC) Variable Cost (VC) Total Cost (TC) MC (AVC)=VC/Q ATC=TC/Q
0 0 15000 0 15000
25 100 15000 575 15575 5.8 5.8 155.8
50 150 15000 900 15900 6.5 6.0 106.0
75 ...

Solution Summary

This solution describes the steps for calculating variable costs, total costs, average variable costs, average total cost and marginal costs. It also explains how to find out profit maximizing output and whether the firm should continue to produce at given level of price. An Excel spreadsheet is also attached and by clicking directly onto the cells, it illustrates how to compute the required values.

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