Unformatted text preview: 60 3 230 35 65 4 260 50 4 280 50 60 5 300 40 5 350 70 55 6 330 30 6 440 90 a. What is the profit maximizing level of output this firm should produce? At Q=4, MR=MC=50, so Q=4 is the profit maximizing level of output. b. Should they consider shutting down? Why or why not? Profit=TR-TC=260-280= -20 For shut-down consideration, John has to compare TR and TVC. At Q=4, TVC=TC-TFC=280-150=130, so TR covers TVC. Therefore, this firm still operates with loss. c. If the firm's fixed costs rose by $100, how will the higher costs affect the profit maximizing level of output in the short-run? The changes in fixed cost has no effect on the output decision in the short-run. d. Going back to the original cost numbers (as for a. and b.). Now consider an excise tax of $25 per unit. Will this affect their profit maximizing level of output? If so, how? $25 tax will increase MC by $25. Therefore, new output level is Q=3 because MR=MC+Tax=35+25=60...
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- Spring '12
- Economics, Economics of production, profit maximizing level