Question

5. Sallys firm produces granola bars with a fixed cost of 10 (this cost is already...

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

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Answer #1

Question 5

(a)

VC = y2 + 2y

Calculate MC -

MC = dVC/dy = d( y2 + 2y)/dy = 2y + 2

Sally will produce that level of output corresponding to which price equals MC.

P = MC

6 = 2y+2

2y = 4

y = 2

If Sally can sell granole bar for 6, Sally should produce 2 bars.

(b)

Market price = 6

Bars produced = 2

Calculate the Total Revenue -

TR = Market price * Bars produced = 6 * 2 = 12

The Sally's total revenue when market price is 6 is 12.

Calculate Profit -

Profit = TR - TC = TR - (FC + VC) = 12 - (10 + (2)2 + (2*2)) = 12 - 18 = -6

Sally's profit is -6.

Calculate Average variable cost -

AVC = VC/y = (y2 + 2y)/y = y + 2 = 2+2 = 4

The AVC of Sally is 2.

A firm keeps operating till the price is greater than the AVC.

Market price is 6.

Since, market price is greater than the AVC, Sally will stay in this market.

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