Answer in Microeconomics for Christian Takyi Mensah #181025
Denek Box company produces card boxes In bundles of 1,000 boxes. The market Is highly competitive, with boxes currently selling for $100 per thousand. Denek’s total and marginal cost curves are:
TC = 3,000,000 + 0.001Q2
2
MC = 0.002Q
Q Is measured In thousand box bundles per year.
a. Calculate Denek’s profit maximizing quantity.
b. Is the firm earning a profit/loss?
c. Analyze Denek’s position in terms of the shutdown condition.
a. For a perfectly competitive firm, profit maximizing quantity is given at the point where:
Price = Marginal Cost
100 = 0.002Q
“Q*= frac{100}{0.002}=50000”
b. Profit = Total Revenue (TR) – Total Cost (TC)
“= PQ* – (3000000+0.001Q^2) \nn= 100 times 50000 u2013 3000000 u2013 0.001(50000)^2 \nn= 5000000 u2013 3000000 u2013 2500000 \nn= -500000”
The firm is making a loss of $500000
c. A firm should operate in perfect competition as long as price is greater than average variable cost (AVC)
P>AVC
“AVC = frac{Total ; variablr ; cost ;(TVC)}{Q} \nn= frac{0.001Q^2}{Q} \nn= 0.001Q”
When Q* = 50000
AVC = “0.001 times 50000 = 50”
Thus, P>AVC, so the firm should continue the production.
