Module 3.

6 Review
Jessie Chen EC 12.302-12B

Check Your Understanding

1.
a. When the quantity is 4, the firm maximize profit. Because when MC
= MR, it will maximum the profit, the interact point for MC and MR is the point when
the quantity is 4.
b. At the profit-maximizing quantity of output, the firm is just break even. Because at
this point when the quantity is 4, the price is equal to the ATC, and TR = TC too.

2.
$500 / 50 = $10
The lowest price that would allow the firm to break even is $10. Because when it is
break even, the price is equal to the ATC, and the ATC is $500 / 50 = $10, so the
price is $10 too.

3.

a. When the price is below the P1, the firm shuts down immediately.
b. When the price is larger than or equal to P1, and smaller than P2, the firm operates
in the short run despite sustaining a loss, which is TR < TC.
c. When the price is larger than P2, the firm operates while making profit.

Multiple - Choice Questions

1.d
2.a
3.d
4.c
5.c
6.b
7.e
8.d
9.b
10.c

Free - Response Questions

2.
a. When the quantity is 1, the marginal cost is $30 - $14 = $16
When the quantity is 2, the marginal cost is $36 - $30 = $6
When the quantity is 3, the marginal cost is $44 - $36 = $8
When the quantity is 4, the marginal cost is $56 - $44 = $12
When the quantity is 5, the marginal cost is $72 - $56 = $16
When the quantity is 6, the marginal cost is $92 - $72 = $20
When the quantity is 7, the marginal cost is $116 - $92 = $24
b. The firm’s profit-maximizing level of output is when the quantity is 4. Because the
price is $14, when the quantity is 5, the marginal cost is $16, which is larger than $14,
so 4 is the maximum profit point.
c. $56 - 4 x $14 = $56 - $56 = 0
The firm’s profit at the profit-maximizing level of output is 0, which is the normal
profit.

3.
a. The firm’s profit-maximizing level of output is when the quantity is 6, which is the
quantity that MR = MC.
b. The firm’s total revenue is $20 x 6 = $120
c. The firm’s total cost is $29.5 x 6 = $177
d. The firm is loss, because the total cost $177 is smaller than the total revenue $120.
e. The firm would not produce in the short run, and it will shut down. Because when
AVC is $22, then TCV will be the $22 x 6 = $132, which is larger than the total
revenue $20 x 6 = $120. If the firm produce more, it will loss more, so the firm will
shut down.