Question

A firm has provided you with the following information:

Output 30
Variable Cost $1,900
Fixed Cost $120
Marginal Cost $50
Price $50

a. What is the firm's short-run profit if they produce using the MC=MR rule?
b. What is the firm's short-run profit if they produce nothing?
c. What will be the firm's production decision in the short-run?

1. Shutdown
2. Exit
3. Operate

Answer 1

(a) Output produced = 30 , Price = $50

Total revenue = Output produced * Price = 30 units * $50 = $1,500

Total Cost= Variable cost + Fixed cost = $1900 + 120 = $2020

At profit maximization or loss minimization point, MR = MC.

Corresponding to an output level of 30, MR=MC =$50

Note: Price is constant at $50. So, the marginal revenue will be $50 at each level of output

Profit = Total revenue - Total Cost.

Profit = $1500 - $2020

Profit = -$520.

The firm's short-run profit is -$520 if they produce using MR=MC.

(b) If a firm produces nothing, then a firm has to bear a fixed cost of $120. It means there is a loss of $120 or a profit of -$120. So, short-run profit is -$120 if they produce nothing.

(c) In the short run, if the firm produces then bear a loss of $520. if a firm produces nothing then bear a loss of $120. So, it is better to shut down the production in the short run in order to minimize the loss of the firm.