Question

Q-1: Sunrise Juice Company sells its output in a perfectly competitive market. The firm's total cost function is given in the following schedule:

Output	Total Cost	Marginal Cost	Average Total
(Units)	($)	($/unit)	Cost ($/unit)
0	50	--	--
10	120	7=(120-50)/(10-0)	12=(120-10)
20	170	?	?
30	210	?	?
40	260	?	?
50	330	?	?
60	430	?	?

Total costs include a "normal" return on the time (labor services) and capital that the owner has invested in the firm. The prevailing market price is $7 per unit.

(a) Prepare (i) marginal cost and (ii) average total cost schedules for the firm.

(b) What is the firm's profit maximizing output level?

(c) Is the industry in long-run equilibrium? Justify your answer. Hint: think about the condition of long-run equilibrium: P=MR=MC=AC)

Answer 1

(a)

Output(units)	Total Cost($)	Marginal Cost($/unit)	Average Total Cost($/unit)	TR ($) = $7*Q	Profit($) = TR - TC
0	50	--	--	0	-50
10	120	7=(120-50)/(10-0)	12=(120-10)	70	-50
20	170	5	8.50	140	-30
30	210	4	7.00	210	0
40	260	5	6.50	280	20
50	330	7	6.60	350	20
60	430	10	7.17	420	-10

(b) The profit maximizing condition is P = MC. It is seen from the table the profit maximizing level of output is 50.

(c) No, the industry is not in long run equlibrium. Because the firm's Fixed cost = $50. But in long run all the costs are variable. There should no be any fixed cost. Again the condition P=MR=MC=AC is not satisfied at the profit maximizing level of output. And we know in the long run firm earns zero economic profit.