model answers costs and revenues

Question 1

fall in variable costs

Answer 1

teh profit maximising firm uses the condition MC=MR to determine the profit maximising level of output Q.

At Q quantity of output the firm faces average total cost of c and earns average revenue of p making supernormal profit of area.

A fall in the wage rate results in a fall in variable cost shifting MC and ATC down to MC1 and ATC1 respectively.

The firm now profit maxims where MC1=MR and Qpm1 is produced at price p1 making a supernormal profit of area

As a result the firms supernormal profit has increased

Question 2

fall in fixed costs

Answer 2

the profit maximising firm uses the condition MC=MR to determine the profit maximising level of output Q.

At Q quantity the firm faces average total costs of c and earns revenue of p making a supernormal profit of pabc

A fall in the warehouse rent results in a fall in fixed costs shifting ATC down to ATC1.

the firm now makes supernormal profit ion PADC1. As a result the firms supernormal profit has increased

Question 3

Fall in demand AR

Answer 3

the profit maximising firm uses the condition MC=MR to determine the profit maximising level of output Q.

At Q quantity the firm faces average total costs of c and earns revenue of p making a supernormal profit of pabc

assuming the good is a normal good a fall in incomes shift the D=AR and MR curve left to D1=AR and MR1 respectively

the trim now profits maximise where MC=MR1 producing Qpm1 goods at price p1 facing a higher average cost of C1

It now makes a loss of C1edP1 and as a result may leave the market in the long run