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Assignment No. 2

Course: Microeconomics ( Econ-101)	Student name:
Academic Year 1439-1440 H	Student ID:
Semester: Ist	student grade:
CRN:	Level of the marks:

Instructions:

· This Assignment must be submitted on Blackboard (WORD format only) via the allocated folder.

· Email submission will not be accepted.

· You are advised to make your work clear and well-presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.

· Assignment will be evaluated through BB safeAssign tool.

· Late submission will result in ZERO marks being awarded.

· The work should be your own, copying from students or other resources will result in ZERO marks.

1. Use the graph below of a perfectly competitive firm’s cost functions to answer this set of questions.

MC

Price

Cost

ATC

AVC

8

6

2

Quantity

40

10

30

a) In the short run, what is the fixed cost for this firm? Explain your answer fully.(1marks)

b) Suppose this firm produces 30 units of output. What is the variable cost of producing this level of output? What is the firm’s AVC of production when it produces 15 units of output. Explain your answer fully.(1 marks)

c) Find the break-even price and the shutdown price. What would happen if the market price was equal to $1 per unit? (0.5 marks)

d) Suppose the market price of the good in the short-run is $8 per unit. (0.5 marks)

i. Does the firm maximize its profit by producing 10 units? If no, which quantity maximizes the firm’s profit. Explain your answer fully.

ii. Given the breakeven price, do you think that the firm is earning a positive or a negative profit when the market price is equal to $8?

A) Answer :- - In order to calculate Fixed Cost, according to the graph pick up two points on the same vertical line, one on ATC curve and the other on AVC curve. The differece between the two points is AFC ( Fixed cost per one unit ). ATC = AFC + AVC AFC = ATC – AVC AFC = 8 – 2 = $ 6

Then, calculate FC ( Fixed Cost for total output ) by multiplying AFC times Number of units produced on the same vertical line as follows :- FC = AFC x Output FC = 6 x 10 = $ 60

B) Answer :- - In order to calculate Variable Cost, First calculate TC ( total cost for total output ) by multiplying ATC by Output ( 30 units ) as follows :- TC = ATC x Output TC = 6 x 30 = $ 180

Then find VC ( Variable Cost for total output ) as follows :- TC = FC + VC VC = TC – FC VC = 180 – 60 = $ 120

- In order to calculate AVC, Fisrt calculate AFC at total output of 15 units as follows :- AFC = FC ÷ Output AFC = 60 ÷ 15 = $ 4

According to the graph, ATC falls between 8 and 6 , let’s suppose ATC = 7 when it produces 15 units , we can calculate AVC as follows :- ATC = AFC + AVC AVC = ATC – AFC AVC = 7 – 4 = $ 3

C) Answer :- - Break-Even price is when the Price = ATC So according to the graph, Break-Even Price = $ 8 because ATC = $ 8 at the same time when the firm produces 10 units. OR, Break-Even Price = $ 6 because ATC = $ 6 at the same time when the firm produces 30 units

- Shutdown Price is the point at which MC = AVC Since there’s no representation for that point on Y axis, we’ll take the closest price to that point. Shutdown price is approximately $ 2

- If the market price was equal to $1 per unit, The firm would shut down and exit the martket because the cost is way greater than the price.

D) Answer :-

i - No, The firm can maximize profits at the point at which MR = MC Since the price = $ 8 Marginal Revenue is the additional revenue earned from selling one more unit. So, MR = $ 8 MR = MC = $ 8 approximately when the firm produces 30 units. So, The firm can maximize its profits by producing 30 units.

ii - If the firm is producing 10 units and selling each unit for $ 8, and ATC = $ 8 So Break-Even price = $ 8 Economic Profit = ( Price – ATC ) x Quantity Produced Economic Profit = ( 8 – 8 ) x 10 = 0 Zero Economic Profits = Normal Profit Accounting Profit must be Positive.