This is for a test that I'm studying for in Economics. I never did understand this stuff. Here's what I have to figure out. I've never been good at Economics, but I'm trying to get this stuff down for my final. Any help would be appreciated. Thanks in advance.
Question 73 of 100
The following table represents price, quantity (Q), total revenue (TR), and cost (TFC=total fixed cost, TVC=total variable cost, TC=total cost, MC=marginal cost, AC=average cost) for a price taker.
Answer the following questions:
- This firm will maximize profit where Q = _______, where marginal revenue and marginal cost are roughly equal.
- Draw the firm's demand curve. Then sketch the marginal cost curve. Drop a line from the intersection to the horizontal axis and label it with the - - Q value that maximizes profit. This profit is $_______?
- Now instead of a price of $5, suppose the price equals $0.75 (75 cents). Which columns of numbers in the table can be compared to the price to prove that the firm should shut down?
-What is the amount of the firm's loss if it shuts down?
I cant seem to view your table at the stated web site. However, your questions practically answer them selves.
1) Your table contents suggest you have a total revenue column. First construct a series of marginal revenue amounts as the change in total revenue caused by a change in Q. Maximum profit occurs when MC=MR.
2) You found the maximizing Q above. Do the algebra and find Total revenue and total cost. Profit=TR-TC.
3) A firm shuts down in the short run if revenue doesnt cover its variable costs. This occurs if price is below the lowest MC.
4) Under a shutdown, a firm's loss is its fixed cost.
To answer this question, let's break it down step by step:
1) To find the quantity (Q) at which the firm will maximize profit, you need to compare the marginal revenue (MR) and marginal cost (MC) values. Unfortunately, you mentioned that you couldn't view the table, so I can't provide specific values. However, here's how you can approach it:
- Marginal revenue (MR) is the change in total revenue (TR) caused by a change in quantity (Q). It is usually calculated as the difference in total revenue between two adjacent quantities. The formula is: MR = ΔTR / ΔQ.
- Marginal cost (MC) represents the additional cost incurred by producing one more unit of output. It is calculated as the change in total cost (TC) divided by the change in quantity (Q): MC = ΔTC / ΔQ.
To find the quantity at which the firm maximizes profit, you need to compare MR and MC values. Look for a point where MR = MC, or where they are roughly equal.
2) Drawing the demand curve and the marginal cost curve requires having the data from the table you mentioned. Here's a general process to follow:
- The demand curve represents the relationship between price and quantity demanded. You plot the different price-quantity pairs from the table on a graph, with price on the vertical axis and quantity on the horizontal axis. Connect the points to form the demand curve.
- The marginal cost curve represents the relationship between quantity produced and the marginal cost. Again, you need specific data from the table to plot this curve.
Once you have the demand curve and marginal cost curve, find the point where they intersect. Draw a line from this intersection point down to the horizontal axis. The quantity value where this line touches the axis represents the value of Q that maximizes profit.
To find the profit at this quantity, use the formula: Profit = Total Revenue (TR) - Total Cost (TC). Substitute the values of TR and TC found at the maximizing Q to get the profit value.
3) In this question, you are asked what columns in the table can be compared to the price ($0.75) to determine if the firm should shut down. Again, without the specific table data, I can't provide a direct answer. However, I can explain the general concept:
When the price is below the lowest marginal cost (MC), the firm should shut down in the short run. In other words, if the price is not enough to cover the variable costs (TVC), the firm will incur losses by producing and should cease production.
Look for the column in the table that represents the variable costs (TVC). Compare the price ($0.75) with the values in this column to determine if the price is higher than the variable cost. If it is lower, the firm should shut down.
4) If the firm shuts down, its loss is equal to its fixed costs (TFC). Fixed costs are the costs that do not change with the quantity produced. Therefore, even if the firm stops producing, it still needs to cover the fixed costs.
Again, without specific values from the table, I can't provide an exact amount of the firm's loss. However, if you have the total fixed cost (TFC) value from the table, that would be the amount of the loss if the firm shuts down.
Hopefully, this breakdown helps you understand the concepts and the steps you need to follow to answer the questions. Good luck with your final!