Exercise 5.2.1

 

We will now study the choice of which quantity to produce for an individual firm in the short run. Draw a graph with produced quantity on the X-axis and cost/revenue (i.e. amount of the currency of your choice) on the Y-axis.

 

l)         You are given data over total cost, TC, at different quantities produced. Draw the corresponding TC curve.

 

q	TC
0	0
20	60
40	80
60	100
80	130
100	240

 

b) For a firm in a perfectly competitive market, the total revenue curve, TR, is unusually easy to draw. What will it look like? Draw TR in your figure. Remember that if you sell nothing, your revenue is zero. The price of the good is 2.20.

 

 

 

c)        Below the graph, construct another graph with the same scale on the X-axis.

First, draw the curve for average variable cost, AVC. Be careful to get the minimum point in the right place. How can you know at which quantity AVC reaches its lowest point?

Then, draw the marginal cost curve, MC. At least one point is easy to find. Which one? Where will the MC curve be above the AVC curve and where will it be below it?

Lastly, draw the marginal revenue curve, MR.

d)       Show how to find the point where the firm maximizes its profit. Where is that in the graph?

e)        The profit can be found in two different ways. Show both of them. Approximately, how large is the profit.

f)        How can one find the firm’s short-run supply curve from the graph? Indicate it in the graph.

g)       Can you find the firm’s long-run supply curve in the graph?