2013 (Output/Costs/Revenues) Paper 3 HL

2013 (Output/Costs/Revenues) 

Paper 3 HL

(a)  Complete the table above by entering the total revenue (TR), average revenue (AR), marginal revenue (MR) and the marginal cost (MC information for all levels of output.

Total Revenue = P x Q

Average Revenue = TR/Q

Marginal Revenue = Change in TR/ Change in Quantity

Marginal Cost = Change in TC/ Change in Quantity

(b)  (i) Using your answers from part (a), identify the profit maximizing level of output for the firm. You must outline the reason for your answer.

 

Profit max = MR = MC

Profit  = TR – TC

Max Profit is where the profit gained between TR and TC is the greatest.

The amount of profit gained between TR and TC with the 3^rd unit of production is $60 (120 – 60) or the 4^th unit of production $60 (140 – 80).

Either the 3^rd or the 4^th unit of production is where profit is maximized.

(iii) Calculate the economic profit/loss, which the firm would make at this level of output.

 

3 units produced TR – TC = Profit, So, 120 = 60 = $60 profit

4 units produced TR – TC = Profit, So, 140 – 80 = $60 profit

 

(d) The graph below illustrates the average total cost and average variable cost information for a firm.

 

On the graph, identify the break-even price and the shut down price for a perfectly competitive firm.

-       Drawing a horizontal line tangent to the lowest points on the AVC & ATC curves

-       Indicating the correct values or positions on the vertical axis (Break even = $7.60) & (Shut down = $6)

(e) (i) Calculate the Total variable cost if output is 50 units per month.

(e) (ii) Calculate Total Cost if output is 30 units per month.

(f) With reference to the graph in part (d), explain the difference between the break-even price and the shut down price.

Break-even price is the price at which a firm is able to just cover its average total costs while the shut down price is the price at which the firm is just able to cover its average variable costs. & In the short run a firm may stay in business even if the price is below the break-even level provided that it is greater than or equal to the minimum average variable cost so that it makes a contribution toward (covers) its fixed costs.