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A local scones shop operating in a perfectly competitive market has a general production function depicted...

A local scones shop operating in a perfectly competitive market has a general production function depicted as: Q = √(KL), where Q = output per week (bags of scones); K = capital, which is fixed at 100 in the short-run; L = labor hours per week.

(a) How much would the firm produce to maximize profits if the price of scones is $20 per bag? How many hours of labor will the company hire per week? What will the firm’s profit be at this price and the chosen level of output? You are given that the firm’s short-run marginal cost (SMC) = 0.12Q

(b) What would be the equation of the short-run Average variable costs for this firm?

(c) Draw SMC and AVC curves on the same plane (graph). What is the firm’s shut-down price? – explain.

(d) Graph the firm’s short-run supply curve, clearly labeling the axes and the curves.

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