A firm in a Perfectly Competitive Market has the following short run cost function (/ equation / formula):
a) Using the cost definitions you have learnt:
i. Determine which part of the equation above represents the total fixed cost, TFC.
ii. Determine which part of the equation above represents the total variable cost, TVC.
iii. Using the definition of AFC, determine the equation of average fixed cost.
iv. Using the definition of AVC, determine the equation of average variable cost.
b) Using the marginal cost function (/ equation / formula): MC=200-12Q+3Q^2, and the other
cost equations you obtained in part (a), fill in the table below
(NOTES: if a value is not a whole number, report it with two decimal points. You are allowed to
use a calculator to help with the calculations. If this question re-appears in your repeat
submissions in tutorials – you will be given a table with just 3 relevant rows).
Q TFC TVC TC ATC AVC MC
c) Based on your data calculated in part (b), plot AVC, ATC and MC curves on one pair of axes – half
an A4 page. Identify any key points on your graph. (NOTE: You may use a computer to help know
the shape of each curve, but you have to hand-draw these curves in your assignment).
d) Assume that the current market price is $296. Determine the quantity produced by the firm and its
economic profit/loss. Reproduce the graph in part (c) and show the economic profit/loss on this
e) Now suppose that the market price falls to $200. How many units of the product should the firm
produce? Does it make an economic profit or loss? If it is a loss, would it shut down temporarily?
f) Now assume that in the long run, the firm’s cost functions / equations / formulas are:
TC=200Q-6Q^2+Q3 and MC=200-12Q+3Q^2. Compare and contrast these equations to the
short run TC and MC equations in part (a) and part (b) and explain why they are similar or different.
g) Based on the long run equations in part (f) and based on the graph in part (c), what is the firm’s
minimum efficient scale and what is the range of output at which the firm is operating in economies
h) In the long run if the market price is at $236, what is the firm’s level of output? Explain why.
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