Question 1. If a firm wants to maximize profit, it will try to minimize th

03 Jun Question 1. If a firm wants to maximize profit, it will try to minimize th

Question
1. If a firm wants to maximize profit, it will try to minimize the cost of producing a given output or maximize the output derived from a given level of cost. The firm will choose it production function . We learned from the isocost curve that if a firm utilizes two inputs such as capital, K and labor, L, it will choose input combination such that whereis the marginal product of capital andis the unit price of capital andis marginal product of labor andis the unit price per labor. In what ways can a firm chose an input combination from several inputs as,?

2. In a perfect competition market, a firm’s variable cost includes all the costs that vary with the quantity produced. It also shows that Price is equal to marginal revenue. In the case of a shirt manufacturing firm, the variable cost includes the cost of workers and raw materials, such as cotton, and the cost of heating and powering the factory for the day, as shown in Table 2.

Output of shirts/min (Q)

Fixed Cost (FC)

Variable Cost (VC)

Total Cost (TC)

Total Revenue (TR)

Price (P)

0

$17

$0

$17

$0

–

1

$17

$5

$22

$4

$4

2

$17

$6

$23

$8

$4

3

$17

$9

$26

$12

$4

4

$17

$13

$30

$16

$4

5

$17

$18

$35

$20

$4

6

$17

$25

$42

$24

$4

Table 2: Deciding how much shirts to produce

Using the Table 2 above

a) Plot a graph showing the Marginal Revenue, Average Variable Cost, Average Total Cost and Marginal Cost.

b) At what conditions do the firm decides to operate?

c) What is considered as the sunk cost?

d) What is the firm’s shutdown price?

3. Monopolistic output decision, marginal revenue is equal to price for the first unit sold, but is less than the price for additional units sold. Do you agree to this statement and why?

Price (P)

Quantity Sold (Q

Total Revenue (TR=P*Q)

Marginal Revenue

$16

0

$0

–

$14

1

$14

$14

$12

2

$24

$10

$10

3

$30

$6

$8

4

$32

$2