Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 201
(b)
Fig. 8-14
(c)
The best, or optimum, level of output of this perfectly competitive firm is given by point D 0 , where MR ¼ MC
and MC is rising. At this point the firm is maximizing total profits (at $735) and is in short-run equilibrium. If
the firm raises its price, it will lose all its customers. If the firm lowers its price, it will reduce its TR unnecessarily,
since it can sell any amount at the market price of $4 per unit. Note that at the output level of 700 units,
the profit per unit is maximum ($1.00), but the firm wants to maximize total profits, not profits per unit. Note
too that MR or P is also equal to MC (point A 0 ) at 100 units of output. At that level of output, however, the firm
maximizes total losses (since the firm has produced all units of the commodity for which MC exceeds MR or
P) and no units for which MR . MC.
8.11 Given the short-run cost curves (Fig. 8-15) for a firm in a perfectly competitive market, find the firm’s
best level of output and its total profits if the equilibrium market price is (a) $18, (b) $13, (c) $9, (d) $5,
or (e) $3.
(a) When P ¼ $18, the best, or optimum, level of output is 7000 units (given by point A). The firm makes $4 of
profit per unit (AN) and a total profit of $28,000. This represents the maximum total profit that the firm can
make at this price.
(b) When P ¼ $13, the best level of output is 6000 units (point B) and the firm breaks even.
(c) When P ¼ $9, the best level of output is 5000 units (point C). At this level of output, the firm incurs a loss of
$5 per unit (DC) and $25,000 in total. However, if the firm went out of business, it would incur a total loss
equal to its TFC of $40,000 (obtained by multiplying the AFC of DE or $8 per unit, times 5000 units).
Thus, the firm would minimize its total losses in the short run by staying in business.
(d ) When P ¼ $5, the best level of output is 4000 units (point F). However, since P ¼ AVC and thus TR ¼ TVC
(¼$20,000), the firm is indifferent to whether it produces or not. In either case, the firm would incur a short-run
total loss equal to its TFC of $40,000. Point F is thus the shut-down point.
(e) When P ¼ $3, the best level of output is 3000 units (point G). However, since P is smaller than AVC, TR
($9000) does not even cover TVC ($18,000). Therefore, the firm would incur a total loss equal to its TFC
($40,000) plus the $9000 amount by which TVC exceeds TR ($18,000 2 $9000 ¼ $9000). Thus, it pays