To determine the output level that a perfectly competitive firm should produce, we examine the profits at each output level by calculating total costs (fixed cost + variable cost) and comparing them with total revenue to find the profit or loss.
Let's calculate the profit (or loss) for each level of output:
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For 300 units (10 workers):
- Fixed Cost = $100
- Variable Cost = $90
- Total Cost = $100 + $90 = $190
- Total Revenue = $150
- Profit = Total Revenue - Total Cost = $150 - $190 = -$40 (loss)
-
For 800 units (20 workers):
- Fixed Cost = $100
- Variable Cost = $295
- Total Cost = $100 + $295 = $395
- Total Revenue = $400
- Profit = $400 - $395 = $5
-
For 1,200 units (30 workers):
- Fixed Cost = $100
- Variable Cost = $490
- Total Cost = $100 + $490 = $590
- Total Revenue = $600
- Profit = $600 - $590 = $10
-
For 1,500 units (40 workers):
- Fixed Cost = $100
- Variable Cost = $670
- Total Cost = $100 + $670 = $770
- Total Revenue = $750
- Profit = $750 - $770 = -$20 (loss)
Now, summarizing the profits:
- At 300 units: -$40 (loss)
- At 800 units: $5 (profit)
- At 1,200 units: $10 (profit)
- At 1,500 units: -$20 (loss)
The firm maximizes its profit by producing where total revenue exceeds total cost the most. In this case, producing 1,200 units yields the highest profit of $10.
Therefore, the firm should choose to produce 1,200 units of output.
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