Question 3 (5 marks)

The following table provides incomplete information on the costs of producing diagnostic imaging tests.It uses two inputs to produce its outputs: capital and labour.The fixed capital costs reflect the monthly leasing cost for the diagnostic imaging machine and the variable labour costs reflects the wages and hours worked by staff.

Assume that the firm is operating in a perfectly competitive market. Also assume that its fixed costs are sunk costs (i.e. it cannot recuperate these costs even if it decides to leave the market.

Quantity produced

Fixed cost

Variable cost

Total cost

Average total cost

Average variable costs

Marginal cost

0

25

0

1

25

35

2

25

60

3

25

80

4

25

95

5

25

105

6

25

125

7

25

155

8

25

188

9

25

226

10

25

280

(a)Complete all empty cells in the table above (1 mark).

(b)Provide a brief explanation of why the marginal costs could exhibit the pattern you observe in part (a). (1 mark)

(c)Add three columns to the table above headed: (i) marginal revenue; (ii) total revenue; and (iii) profit. If the market price was $39, complete all new columns in the table over the output range of 0 to 10 (1 mark)

(d)If the market price was $39, what would be the optimum level of production for the firm? Why? (2 marks).