Question

Suppose Lu operates a profit maximizing shop in a perfectly competitive market where all firms are...

Suppose Lu operates a profit maximizing shop in a perfectly competitive market where all firms are identical. Her fixed costs are $14 per month. Her variable costs per month are given in the following table: (For simplicity, assume Lu can only produce in whole units each month)

Use the table below to fill in the missing values for total cost, average variable cost (AVC) and average total cost (ATC). Use your table to calculate the marginal cost for each additional unit of output produced per month. (2 points)

Quantity Variable Cost Total Cost AVC ATC
0 $0
1 $16
2 $22
3 $30
4 $42
5 $58
6 $78

Suppose that, in the short-run, the market price is $18 per unit. How many units would Lu produce and sell? Be sure to briefly explain how you derived your answer. How much profit will Lu earn each month?

Suppose that, instead of a market price of $18, the short-run market price is $13 per unit. How many units would Lu produce and how much profit will she earn each month? If the market price is $13, would Lu choose to operate her firm in the short-run or would she shut down? Briefly explain.

Homework Answers

Answer #1
Q VC TC AVC ATC MC
0 0 14
1 16 30 16 30 16
2 22 36 11 18 6
3 30 44 10 14.66667 8
4 42 56 10.5 14 12
5 58 72 11.6 14.4 16
6 78 92 13 15.33333 20

a) When P=18

The firm will set P=MC for profit maximization

so, Lu will produce 5 units

Profit = P-ATC*Q = (18-14.4)*5 = 18

b) When P=13

Lu will produce 4 units

Loss = P-ATC*Q = (13-14)*4 = -4

Lu will choose to operate in the short run rather than shutting down as the price is greater than minimum AVC so she will be able to recover her variable cost but if Lu shuts down, her loss would be equal to her fixed cost which is greater than the loss, Lu is making by continuing to operate.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. Madeline makes straw baskets in the perfectly competitive basket market in Charleston, South Carolina.The table...
1. Madeline makes straw baskets in the perfectly competitive basket market in Charleston, South Carolina.The table below illustrates her cost of production. Complete the table showing Madeline’s average total cost (ATC), average variable cost (AVC), and marginal cost (MC). a) Suppose the equilibrium price in the straw basket market is $25. b) How many straw baskets should Madeline produce? c) At this price, will Madeline earn positive or negative economic profits? d) If next week the equilibrium price of straw...
Sally's rocket store is experiencing fierce competition in a perfectly competitive market. The market price for...
Sally's rocket store is experiencing fierce competition in a perfectly competitive market. The market price for a rocket is less than her ATC of producing the profit maximizing quantity, but greater than AVC. Sally should: a.) Produce in the short run, and produce in the long run. b.) Produce in the short run, and exit in the long run. c.) Shutdown in the short run, and produce in the long run. d.) Shutdown in the short run, and exit in...
Assume that the market for fertilizer is perfectly competitive. Firms in the market are producing output...
Assume that the market for fertilizer is perfectly competitive. Firms in the market are producing output but they are experiencing economic losses. Explain how ATC, AVC and MC are related (Note: the relationship of these cost curves is same whether there is loss or profit). Explain how the price of fertilizer compares to the ATC, AVC and MC of producing fertilizer Draw two graphs side by side illustrating the present situation for the single firm and the entire market. Cleary...
Bong-Bong produce orange juice concentrate that operates in the competitive market. Estimated number of firms are...
Bong-Bong produce orange juice concentrate that operates in the competitive market. Estimated number of firms are 200. Suppose that the manager of the firm operating in a competitive market has estimated the firm’s average variable cost function to be AVC=10-0.03q+0.00005q2 and the total fixed cost is $600. e)If the forecasted price of the firm’s output in $10 per unit, what is the optimal output and firm’s profit? What is the producer surplus? f)What would happen in the long run in...
Suppose that a paper market is perfectly competitive. A profit-maximizing competitive firm in this market has...
Suppose that a paper market is perfectly competitive. A profit-maximizing competitive firm in this market has marginal cost of $5, profit of $100 and 50 units of paper. (a) Compute total revenue and total cost (10 points). (b) Suppose that the firm has variable cost of $50. Compute the average variable cost and fixed cost.
We have the following information about a profit-maximizing firm in a perfectly competitive market: Price =...
We have the following information about a profit-maximizing firm in a perfectly competitive market: Price = 95 Quantity = 1000 Average Total Cost (ATC) = 95 Average Variable Cost (AVC) = 83 Which of the following is correct? The firm is making a loss The firm is making an economic profit The firm should shut down The firm should keep operating
Sam runs his business in a perfectly competitive market. At the point where marginal cost equals...
Sam runs his business in a perfectly competitive market. At the point where marginal cost equals marginal revenue, ATC=$50, AVC=$25, and the price per unit is $55. In this situation, Select one: a. the market price will rise in the short run to increase profits. b. Sam's business is earning a positive economic profit. c. Sam's business is losing money in the short run, but should continue to operate. d. Sam's business should shut down immediately.
A profit maximizing firm in a competitive market currently produces and sells 9,200 units of output...
A profit maximizing firm in a competitive market currently produces and sells 9,200 units of output at a price of $2.75 per unit. The firm’s total fixed cost is $1840 and its total variable cost is $23,920. What should this firm do in the short run? Show and Explain.
1. There are four competitive, profit-maximizing firms in the Bozeman craft brewing market: Bozeman Brewing Company,...
1. There are four competitive, profit-maximizing firms in the Bozeman craft brewing market: Bozeman Brewing Company, Bridger Brewing, Outlaw Brewing, and 406 Brewing Company. Suppose these four firms are price takers and have the same cost function: C(qi) = 600 + 20qi + 2qi2 where qi is output of firm i measured in kegs. Each firm can sell its output for $100 per keg. Write down the profit function for one of these firms. What is its marginal cost function?...
1) A perfectly competitive firm that sells fish has a marginal cost function given by MC...
1) A perfectly competitive firm that sells fish has a marginal cost function given by MC = 3q. The market has determined a price of P = 60. How many fish will this firm produce? 2)See the previous question about the perfectly competitive fish firm. Suppose that at this level of output, the firm has average costs of production of ATC = 42. How much total economic profit will the firm earn? 3) A perfectly competitive firm will shut down...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT