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Economic Profit and Loss

4. Answer the next questions on the basis of the following cost data for a firm in pure competition:

OUTPUT ------ TFC ---------- TVC
0 $100.00 0.00
1 100.00 70.00
2 100.00 120.00
3 100.00 150.00
4 100.00 200.00
5 100.00 270.00
6 100.00 360.00

(a.) Refer to the above data. If the product price is $45, at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.

(b.) Refer to the above data. If the product price is $75, at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.

5. A software producer has fixed costs of $18,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below:

Q TVC Price
1,000 $15,000 $25
2,000 20,000 24
3,000 30,000 23
4,000 50,000 22
5,000 80,000 20

(a.) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work). Show calculations

(b.) What should be the production level if fixed costs rose to $48,000 per month? Explain.

6. Show all work and calculations
(a.) Suppose nominal GDP in 1999 was $200 billion, and in 2001, it was $270 billion. The general price index in 1999 was 100 and in 2001 it was 150. Between 1999 and 2001, the real GDP rose by what percent?

Solution Preview

4. Answer the next questions on the basis of the following cost data for a firm ipure competition:    
          
Output TFC TVC Marginal Cost,MC*
0 100 0
1 100 70 70
2 100 120 50
3 100 150 30
4 100 200 50
5 100 270 70
6 100 360 90
* Marginal Cost=Change in TVC/Change in output.

(a.) Refer to the above data.  If the product price is $45, at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss?  How much will the profit or loss be?  Show all calculations.      

For optimal output, a purely competitive firm will choose its output level till marginal revenue (MR=Price) is greater than MC or MR=MC.
Refer to above table, we find that at Q=3, MC is $30 which is less than (MR=P=$45), after wards it is greater than 45.
So, Q=3 is a optimal production level for price=$45.

At Q=3, Total Revenue=3*45=135
Total Cost=TFC+TVC=100+150= 250
Profit=TR-TC=135-250=-115
Firm will make en economic loss at this level.
Losses are more than TFC, it should shut down in the short run.

(b.) Refer to the above data.  If the product price is $75, at its optimal output, will ...

Solution Summary

Solution determines economic profit of a purely competitive firm at given market prices, second problem depicts the steps to calculate optimal output level in the given scenario of a monopolistic competitive market and third problems explains the methodology to find growth rate of real GDP, size of labor force and unemployment rate.

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