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ECON 201
Principles of Microeconomics
a. Fill in the missing values in the table.
b.
A perfectly competitive firm has fixed costs of $30 and total costs as
indicated in the table below.
Spring 2014
Solution Problem Set
Yoto Yotov
Output
Total Fixed Cost
Average Fixed Cost
Average Variable Cost
Average Total Cost
Graph total fixed cost, total variable cost, and total cost. (Be sure to
understand what is behind the shape of each of the curves.)
Marginal Cost
Total variable Cost
Total Cost
Fixed cost does not change with output. Total variable and total costs are always increasing with output, first at a decreasing rate and then at an increasing rate. This is thecase because marginal costs are first decreasing and then increasing.
0
20
40
60
80
100
120
140
0 2 4 6 8 10 12
TFC, TVC, TC
Output (Q)
Total Costs
TC
VC
FC
c.
d. What will happen to the AVC, ATC, and MC if the fixed cost increases by 40.
e.
f. Answer the questions in part (e) is the price was $8.5.
g. Answer the questions in part (e) is the price was $6.
If the market price is $6, the perfectly competitive firm will not produce any output because at this price the loss minimizing output will be 4 units (Loss=$36) and the firm cannot cover even its variable costs ($30).
If the market price is $8.5, the perfectly competitive firm will produce 6 units of output (P=MC) and make losses equal to the difference between the total revenue at this price ($51) and the total cost for the production of 6 units ($75), thus the loss will be equal to $24. The firm will stay in business because it covers its variable costs ($45).
Graph AFC, AVC, ATC, and MC. Mark the two key points as discussed in class. Explain in your own words why the MC curve intersects both the AVC and ATC curves at their minimums.
Remember the basketball player's average and how it increased when he scored higher than the average and decreased whenever he scored less than his average?
AVC and MC will not change, while the ATC will be higher for each output level
If the market price is $13.5, the perfectly competitive firm will produce 9 units of output (P=MC) and make profits equal to the difference between the total revenue at this price ($121.5) and the total cost for the production of 9 units ($108), thus the profit will be equal to $13.
How much will the firm produce if the market price that it faces is $13.5. Will the firm make profits or losses? How much?
0
5
10
15
20
25
30
35
40
45
0 2 4 6 8 10 12
AFC
AVC
ATC
MC
Shut-Down Point
Break-Even Point
