COSTS OF PRODUCTION

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Case Assignment

  1. The following table gives short-run and long-run total costs for various levels of output for a perfectly competitive firm:
Output (Q) SRTC AVC TR
0 350    
1 400    
2 425    
3 465    
4 505    
5 560    
6 635    
7 730    

Note: AVC is Average Variable Cost

TR is Total Revenue

SRTC is Short Run Total Cost

SRTC = FC + VC (Total Cost = Fixed Cost + Variable Costs)

Please see background material for additional formulas.

  1. Suppose the fixed cost (FC) of production is $350 and Price (P) is $55, complete the table above. (Cut and paste the table into a separate document).
  2. Suppose you are producing 2 units of output (Q = 2), if you want to produce one extra unit of output (Q = 3), what would be the marginal cost? (Show your work.)
  3. If the market price is given as $55, how much output will the perfectly competitive firm produce to maximize profits? (Show your work.)
  4. Calculate the profit or loss. (Show your work.)
  5. Should the firm always shut down in the short run when it experiences a loss? Explain.

Assignment Expectations

Use concepts from the modular background readings as well as any good-quality resources you can find. Be sure to cite all sources within the text and provide a reference list at the end of the paper.

Format: double-spaced and typed.

The following items will be assessed in particular:

  • Show all work for numerical problems.
  • Your ability to understand costs and how firms make decisions.
  • Some in-text references to the modular background material.
  • The assignment should address each element of the assignment. Remember to support your answers with solid references including the Case readings.

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