Question 4 i. Discuss the difference between average revenue...

Question 4 i. Discuss the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm? [4 marks] ii. Discuss the law of diminishing returns and how it explains the shape of the short run average cost curve [4 marks] iii. Camille's variable cost, VC, is his wage cost ($80 per worker per day) and his other input costs ($0.50 per cup). a. Complete the following table [12 marks] b. If the firm closes down and produces no output, what will be its total cost? Explain [3 marks] Labour Quantity of FC VC TC (workers) frozen yogurt (cups) AC $ MC $ 1 110 235 2 200 3 270 4 300 5 320 3

Transcript

00:01 We have to given a graph and on the basis of this the questions are asked and we have to answer.

00:07 So for the part 1 of question, they ask what is the optimum level of the optimum level of output of the firm according to the graph.

00:17 So first we can understand is optimum level is what the optimum level of output is where firms marginal cost is equals to marginal revenue that is mr is equals to mc.

00:29 Okay, because this is because at this level of output the firm is maximize its profit firm maximize profit.

00:39 That's why it is known as the optimum level of output.

00:42 So when we talk about the particular graph the mc and mr mc and mr curve intersect at quantity is equals to 6.

00:55 So this indicating that this is the optimum level of the firm.

00:59 So at quantity is equals to 6, this is the optimum level of firm where we can say mr and mc intersect or we can say they are equal.

01:18 Now for the second question, they ask the maximum price of the firm can charge that is determined by demand curve maximum price.

01:26 What firm can charge is determined by demand curve.

01:33 So here we can see in the given graph the demand curve intersect marginal cost demand curve.

01:44 Intersect mc at quantity 6.

01:53 So here the corresponding price is 10.

01:57 So the firm can charge maximum 10 for the maximum profit maximum price is taken charge for the third price third question.

02:06 We have to determine whether the firm make economic profit or economic loss at a given price and output combination.

02:13 So for this we need to compare the average total cost.

02:18 Price we need to compare them.

02:22 So if atc is greater than the price then firm is making economic loss where if atc basically if atc is less than price then firm is making economic profit.

02:42 Okay, so here in the given graph atc curve is above the price of 10 here atc curve is above the price of 10, which is a maximum price the firm can charge at the optimum level indicate that because it is greater than price.

03:07 So it indicate that there is firm can is making economic loss according to the graph we can say the firm is making economic loss.

03:17 So here we can say just give me a second.

03:23 When we talk about the next part of the question, so just give me a second...

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