Pawel is a consultant for an economic advisory service. He currently produces 10 hours per week of consultancy services. The price of an hour of his services is $\$ 60$, and the market for consultancy services is perfectly competitive. The table below shows his costs associated with producing 10 hours of services:
\begin{tabular}{ll}
Type of cost & Cost \
\hline$M C(10)$ & $\$ 60$ \
$A T C(10)$ & $\$ 80$ \
$A V C(10)$ & $\$ 50$
\end{tabular}

If Pawel wants to maximize profit, what is his best course of action in the short run?

Choose 1 answer:
(A) do not change output
(B) exit the industry
(C) decrease output
(D) shut down
(E) increase output

Question

Pawel is a consultant for an economic advisory service. He currently produces 10 hours per week of consultancy services. The price of an hour of his services is $\$ 60$, and the market for consultancy services is perfectly competitive. The table below shows his costs associated with producing 10 hours of services:
\begin{tabular}{ll} 
Type of cost & Cost \
\hline$M C(10)$ & $\$ 60$ \
$A T C(10)$ & $\$ 80$ \
$A V C(10)$ & $\$ 50$
\end{tabular}

If Pawel wants to maximize profit, what is his best course of action in the short run?

Choose 1 answer:
(A) do not change output
(B) exit the industry
(C) decrease output
(D) shut down
(E) increase output

Accepted Answer

∻Solution∻ ‖ a ⋮ Definition of Short-Run Decision: In the short run, a firm should continue to produce as long as the price ($P$) covers the average variable cost ($AVC$). ‖ ‖ b ⋮ Calculation of Economic Profit: Economic profit is calculated as total revenue ($TR$) minus total cost ($TC$). Here, $TR = P imes Q$ and $TC = ATC imes Q$. ‖ ‖ c ⋮ Given Data: $P = \$60$, $Q = 10$, $MC(10) = \$60$, $ATC(10) = \$80$, $AVC(10) = \$50$. ‖ ‖ d ⋮ Profit Maximization Condition: In a perfectly competitive market, profit is maximized when $P = MC$. Here, $P = MC(10) = \$60$. ‖ ‖ e ⋮ Economic Profit Calculation: $TR = 60 imes 10 = \$600$, $TC = 80 imes 10 = \$800$, Economic Profit = $600 - 800 = -\$200$. ‖ ‖ f ⋮ Decision Making: Since $P > AVC$, Pawel should continue producing in the short run despite the loss. ‖ ∻Answer∻ ⚹ (A) do not change output ⚹ ∻Key Concept∻ ⚹ Short-Run Production Decision ⚹ ∻Explanation∻ ⚹ In the short run, a firm should continue to produce if the price covers the average variable cost, even if it incurs a loss, as long as the price equals the marginal cost. ⚹◊What is the formula for calculating total cost (TC⍭ Generate me a similar question◊

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