Question

Sallys firm produces granola bars with a fixed cost of 10 (this cost is already sunk). Her variable cost function is V C = y² + 2y.

(a) If she can sell granole bar for 6, how many bars should Sally produce?

(b) What is Sallys revenue if the market price is 6? What is her profit? Does she want to stay in this market? Explain.

SHOW WORK!

Answer 1

Sallys firm produces granola bars with a fixed cost of 10 (this cost is already sunk). Her variable cost function is V C = y2 + 2y.

(a) If she can sell granole bar for 6, the profit function becomes

π = pq - c = 6y - y2 - 2y

= 4y - y^2

Profit is maximized when π'(y) = 0

4 - 2y = 0

Hence y = 2. She should produce 6 granoles. (Fixed cost is not taken in profit function as it is sunk and cannot be recovered)

(b) Revenue is 6*2 = 12. Cost is 2^2 + 2*2 = $8. Profit = 12 - 8 = $4. She stays in the market because she is earning profit.