Question

1a.)Suppose Ben owns a small company that makes kites. The market for kites is perfectly competitive, and kites sell for $25 each. Ben's total production costs vary depending on the number of kites he makes each day, as shown in the accompanying table.

Number of kites Per Day	Total Cost Per Day ($)
0	100
1	110
2	126
3	148
4	172
5	200
6	235

When Ben makes 2 kites per day, what is his average variable cost?

a.)		$13
b.)		$26
c.)		$50
d.)		$63

1b.)

What is the profit-maximizing number of kites for Ben to make each day?

a.)		3
b.)		4
c.)		5
d.)		0

1c.)

What is Ben's economic profit at his profit-maximizing level of output?

a.)		−$72
b.)		−$73
c.)		−$75
d.)		−$100

2d.)

Should Ben shut down?

a.)		Yes, because his economic profit is negative.
b.)		Yes, because he cannot earn enough revenue to cover his variable cost.
c.)		No, because his economic profit is positive.
d.)		No, because he can earn enough revenue to cover his variable cost.

2e.)

If Ben's fixed cost rises, then in the short run, his:

a.)		profit-maximizing level of output will rise.
b.)		profit-maximizing level of output will fall.
c.)		profit-maximizing level of output will not change.
d.)		economic profit will not change.

Answer 1

1a)
Answer

FC=the cost is same at all level and it is equal to total cost at Q=0
FC=100
VC(2)=126-100=26
AVC(2)=VC/Q=26/2=13

Option a
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1b)
Answer
option b
The firm produces at P=MC or the nearestlower MC
MC(n)=TC(n)-TC(n-1)
MC(n)=marginal cost of n th unit
TC(n)=Total cost of n units of output

MC(1)=110-100=10
MC(2)=126-110=16
MC(3)=148-126=22
MC(4)=172-148=24
MC(5)=200-172=28
MC(6)=235-200=35

P=25 and MC=24 at Q=4 units
so the firm produces 4 units

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1c)
ANswer
Option a
Economic profit =TC-TC
TR=P*Q=25*4=100
TC=172
Economic profit =100-172=-$72

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1d)
Answer
Option d
No, because he can earn enough revenue to cover his variable cost.
A firm makes losses equal to fixed cost if shutdown so any firm shut down if the firm can not corve its variable cost but this firm covers all of its variable costs.
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1e)
Option c
profit-maximizing level of output will not change
A firm maximizes profit at MC=P and the MC does not change when the fixed cost changes so the MC=P output level also does not change.