The table below shows the cost of production and output of maize. The price of maize is fixed $20.00. Use the information to answer the questions that follo...
Question 1 Report
The table below shows the cost of production and output of maize. The price of maize is fixed $20.00. Use the information to answer the questions that follow.
| Maize (bags) | Total Variables ($) | Total cost ($) | Total Revenue ($) |
| 0 | 0 | 10 | 0 |
| 1 | 8 | w | 20 |
| 2 | 10 | x | 40 |
| 3 | u | 25 | y |
| 4 | v | 32 | z |
| 5 | 28 | 38 | 100 |
a. what is the value of total cost? Give a reason for your answer.
b. Calculate the values of u,v,w,x,y and z
c. Calculate the profit levels 1 and 4
d. In what market structure is the firm operating? Give a reason for your answer.
Answer Details
Total cost is fixed cost plus total variable cost, \(TC=TFC+TVC\). When output is zero, \(TVC=0\) and \(TC=10\), so the total fixed cost is 10 dollars.
(a) The fixed part of total cost is $10, because it is the cost the firm bears even when output (and therefore variable cost) is zero.
(b) Using \(TC=TVC+10\) and \(TR=\text{price}\times\text{quantity}=20\times Q\):
- \(w=TC\text{ at }1=8+10=18\)
- \(x=TC\text{ at }2=10+10=20\)
- \(u=TVC\text{ at }3=25-10=15\)
- \(v=TVC\text{ at }4=32-10=22\)
- \(y=TR\text{ at }3=20\times3=60\)
- \(z=TR\text{ at }4=20\times4=80\)
| Maize (bags) | TVC ($) | TC ($) | TR ($) |
|---|---|---|---|
| 0 | 0 | 10 | 0 |
| 1 | 8 | 18 | 20 |
| 2 | 10 | 20 | 40 |
| 3 | 15 | 25 | 60 |
| 4 | 22 | 32 | 80 |
| 5 | 28 | 38 | 100 |
(c) Profit \(=TR-TC\). At output 1, profit \(=20-18=\$2\). At output 4, profit \(=80-32=\$48\).
(d) The firm sells every bag at a constant price of $20 no matter how much it produces, so it operates under perfect competition; the constant price means the firm is a price taker facing a perfectly elastic demand.
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