Question

I am not too sure about how to get A. B. C. and D. parts of the question.

Complete the table below. Complete the following questions.

Quantity	TC	FC	VC	AFC	AVC	ATC	MC
0	1000	1000	0	********	********	********	********
50	1500	1000	500	20	10	30	10
100	1800	1000	800	10	8	18	6
150	2400	1000	1400	6.67	9.33	16	12
200	3200	1000	2200	5	11	16	16
250	4500	1000	3500	4	14	18	26
300	6000	1000	5000	3.33	16.67	20	30

Assume the market price is $26:

Firm’s Output	Firm’s Profit
250	2000

Assume the market price falls to $16.

Firm’s Output	Firm’s Profit or Loss (Use a – to indicate loss)
200	0

a. Should the firm shut down production if the price is $16? Explain.

Assume the market price falls to $12.

Firm’s Output	Firm’s Profit or Loss (Use a – to indicate loss)
150	-600

b. Should the firm shut down production if the price is $12? Explain.

Assume the market price falls to $6.

Firm’s Output	Firm’s Profit or Loss (Use a – to indicate loss)
100	-1200

c. Should the firm shut down production if the price is $6? Explain.

d. Which demand curve ($26, $16, $12 or $6) is associated with the long run equilibrium? Explain. (All costs are economic costs.)

Answer 1

a) No, at the price of $16 the firm will be only breaking even i.e. the revenue and the cost are equal. At that point the firm can continue production even in the long run. It is the breaking even point.

b)No, as the price is above the AVC the firm can continue to produce in the short run, when the price falls below the AVC that will be the shutdown price in the market. Here, the firm will face a loss and continue production in the short run as the price is covering the variable cost.

c) Yes, as the price is below the AVC the firm will shutdown in the short run, as they can;t even take out the total cost of production.

d) The price where the firm was breaking even i.e. no profit or no loss ,the price of $16 will be the long run cost.