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Question
Microeconomics
Posted 2 months ago

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\$ 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 \\
\hlineMC(10)M C(10) & $60\$ 60 \\
ATC(10)A T C(10) & $80\$ 80 \\
AVC(10)A V C(10) & $50\$ 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
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Answer from Sia
Posted 2 months ago
Solution
a
Definition of Short-Run Decision: In the short run, a firm should continue to produce as long as the price (PP) covers the average variable cost (AVCAVC)
b
Calculation of Economic Profit: Economic profit is calculated as total revenue (TRTR) minus total cost (TCTC). Here, TR=P×QTR = P \times Q and TC=ATC×QTC = ATC \times Q
c
Given Data: P=$60P = \$60, Q=10Q = 10, MC(10)=$60MC(10) = \$60, ATC(10)=$80ATC(10) = \$80, AVC(10)=$50AVC(10) = \$50
d
Profit Maximization Condition: In a perfectly competitive market, profit is maximized when P=MCP = MC. Here, P=MC(10)=$60P = MC(10) = \$60
e
Economic Profit Calculation: TR=60×10=$600TR = 60 \times 10 = \$600, TC=80×10=$800TC = 80 \times 10 = \$800, Economic Profit = 600800=$200600 - 800 = -\$200
f
Decision Making: Since P>AVCP > 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.

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