Hi I need some help for the following question:
A firm in a perfectly competitive industry knows the following about its costs and revenue. The firm would like to maximize profit and has hired a consultant for advice.
What advice should the consultant give to this firm? (To shutdown, reduce output, increase output etc.)
I will really really appreciate any help anyone can give to this, cause I'm a bit stumped. =[
- 6 years agoFavorite Answer
Let's start with finding out what we can for the information that is not found. The AFC is 4 because the ATC-AVC=AFC, so that leads us to the fact that output(Q) is 1250, because 5000(TFC) / 4 (AFC) gives you Output. Now we can find everything else. TC= 10x1250=12500 and VC=6x1250=7500. P=6200/1250=4.96
So... here is all of the data that we collected from above.
Now,let's use this data to find out what this firm should do. Because the firm is perfectly competitive P=MR. A firm's profit maximizing output is where MC=MR, so this firm should reduce output (if it does not shut down). Now, we can look to see if the firm is making a loss, profit, no profit, or should shut down. TC is 12500, and TR is 6,200, so this firm is producing at a loss of 6,300. Should they shut down? If the firm shutdown, they would be making a loss of 5000, from FC. So shutting down actually saves them a loss of 1,300, even though they are still producing at a lost.
I hope this helps you understand!
- Anonymous6 years ago
ATC = AVC + AFC
AFC = 4
AFC * Q = TFC
Q = TFC/AFC = 5000/4 = 1250
TR = P*Q
or,P = 4.96
TC = ATC*Q = 10*1250 = 12500
TVC = AVC *Q = 6*1250 = 7500