Micro2Solutions

Prep101comfreestuff use the following figure to

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Unformatted text preview: wing figure to answer question 30: MC P rice and Cost ATC 7 5 15 Quantity Q30. Suppose, in the short run, the market price of a good is $5. A firm operating in a perfectly competitive market will produce ____units of output and make an economic____. a) b) c) d) e) Less than 15 units; loss of less than $30 Less than 15 units; profit of more than $30 More than 15 units; profit of less than $30 More than 15 units; loss of more than $30 12 units; loss of $20 Solution: a) Less than 15 units; loss of less than $30 If 15 units were produced, economic profit = TR – TC = P*Q – ATC*Q = 5*15 – 7*15 = 75 – 105 = -$30. At 15 units, MC > MR. Firm maximizes profit (minimizes loss) where MC=MR=P Q < 15 Q31. If a profit-maximizing firm in perfect competition is incurring economic losses, but is not shutting down, then it must be producing a level of output where a) b) c) d) e) Marginal cost is below average variable cost Marginal cost is greater than average total cost Marginal cost is greater than average variable cost, but is below average total cost Marginal cost is greater than average total cost, but is below average variable cost Marginal cost exceeds marginal revenue Solution: c) Marginal cost is greater than average variable cost, but is below average total cost Economic profits = TR – TC = (MR – ATC)*Q Profit-maximization occurs when MR= MC=P Page 19 of 33 ©Prep101 www.prep101.com/freestuff Eco...
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This note was uploaded on 08/26/2010 for the course ECON 208 taught by Professor Dickenson during the Fall '07 term at McGill.

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