ECO 305 Lecture Notes - Lecture 7: Average Variable Cost, Marginal Cost, Fixed Cost
1) A firm in a competitive industry has a total cost function of TC = 0.2 Q2 – 5Q + 30,
whose corresponding marginal cost curve is MC=0.4Q – 5. If the firm faces a price of 6,
a) What quantity should it sell? (10 points)
MC = P
= 0.4Q – 5 = 6
Q = 27.5
b) What profit does the firm make at this price? (10 points)
Profit = revenue – cost
= (27.5*6) – [0.2(27.5)2 – 5(27.5) + 30]
= 121.25
c) Should the firm shut down? (10 points)
Because the firm earns positive profit, it should stay open.
2) If short-run marginal cost and average variable cost curves for a competitive firm are
given by SMC = 2 + 4Q, and AVC = 2 + 2Q,
a) how many units of output will it produce at a market price of $10? (15 points)
P = 10 and SMC = 2 + 4Q
10 = 2 + 4Q
8 = 4Q
Q = 2
b) At what level of fixed cost will this firm earn zero economic profit? (15 points)
EP = (P– AVC) *Q – FC
0= (10 – 6) *2 – FC
FC = 8
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Document Summary
A firm in a competitive industry has a total cost function of tc = 0. 2 q2 5q + 30, whose corresponding marginal cost curve is mc=0. 4q 5. If the firm faces a price of 6: what quantity should it sell? (10 points) Q = 27. 5: what profit does the firm make at this price? (10 points) = 121. 25: should the firm shut down? (10 points) P = 10 and smc = 2 + 4q. Q = 2: at what level of fixed cost will this firm earn zero economic profit? (15 points)
