1.
The level of output to be produced by the firm in the short-run.
1.
Explanation of Solution
Every firm’s main objective is to maximize the profit. Firm’s usually decide the price and output which help them to maximize the output.
For profit maximization condition we will differentiate wr.t “q”
Applying the condition for “maxima”
So,
P = MC
Under
So, the graph output in short run will be “3”
2
The change in pricing policy by the firm under short run.
2
Explanation of Solution
As firm try to operate at profit maximization output,under this output firm will charge the price which will help them to keep on the output level.
For profit maximization condition we will differentiate wr.t “q”
Applying the condition for “maxima”
So,
P = MC
Under perfect competition, firm profit maximize the profit where “MC = P”.
So, by the graph under profit maximization condition “MC = P”. Price will be “70”.
3.
To calculate: The total cost at given level of output.
3.
Explanation of Solution
Total cost is the sum of variable cost and total fixed cost.
Here Total fixed cost = 100
Total Variable cost = 120
As firm operate on the profit maximizing output, on this output level, the firm’s total cost will be “$220”.
4
To calculate: thevariable cost at given level of output.
4
Explanation of Solution
Variable cost is the cost which changes with change in the output.
Example − The raw material used for production. When firm wants to increase production the demand for raw material increases which lead to increase its cost. Whereas when firm wants to decrease production, it needsfewer raw materials which lead to decrease in the cost.
So, that’s why variable costvary according to level of production.
So, at the profit maximizing output level, firm’s variable cost will be “120”.
5
To calculate: Thefixed cost at given level of output.
5
Explanation of Solution
Fixed cost are the costs which does not change with the change in output level.
Example − The fixed cost can be utilities like electricity or rent. These costs are independent of production level and are termed as fixed.
As firm is operating at profit, maximum level of output at this output firm’s fixed cost will be “100”.
6
Firm’s profit level in short runwhen producing at given level of output.
6
Explanation of Solution
Profit is the amount a firm receive after compensating all the cost which it incurs for producing the output. At the profit maximization output, firm’s profit is
Firm’s profit will be “revenue − cost “which will be
7
Firm’s profit at shut-down point.
7
Explanation of Solution
Shut down − When a firm cannot recover its variable cost, then this point is known as shut down point.
Example − If the variable cost of a firm is “$100” but it is making “$80” in revenue then for that firm, it is better to shut down than to be in business.
At shut down condition P =
So,P should be 40 and profit will be -100. So, P = 40 will be firm’s shut down point.
8
Whether the firm will continue to operate or shut-down its operations in the long-run.
8
Explanation of Solution
As firm is not able to recover the variable cost which means that firm is unable to meetits day to day cost and is going under loss, that’s why firm will not work in the long run.
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Chapter 8 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
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