Question

The Great Wall of China attracts millions of tourists every year, with many vendors selling goods at key tourist destination points. During summer, the vendors all sell icy cold bottled water. Assume the market for bottled water is perfectly competitive. Ji is a vendor in this market who sells 73 bottles (where price equals marginal cost) at the market price of $2, with the average total cost being $2.40 per bottle. The minimum average variable cost is $1.90 per bottle.

Answer the following questions:

Ji’s economic profit or loss is

(use a negative value if a loss). Answer in dollars, rounded to two decimal places (ie: to the nearest cent).

Should Ji shut down? Type Y for Yes, or N for No

.

State whether the following statement is true or false: "Ji needs to minimise her loss of $0.40 per bottle by producing the quantity where price equals her marginal cost." Type T for true, or F for false

Answer 1

Formula of measuring Economic Profit is -

Total Revenue - Economic Cost (explicit cost + implicit cost)

= ( 73 x 2) - (73 x 2.40

= 146 - 175.2

Economic Profit = $- (29.2) i.e. Economic Loss

Ji should not shut down her operation, as Ji is recovering her variable cost, so if Ji shut down her operation. So she has to borne fixed cost. But in this case Ji is bearing some part of fixed cost i.e. ( 2.40 - 2 = $.040 but total fixed cost is 2.4 - 1.9 = $0.5).

So JI, should not shut down her production.

False because Ji needs to minimise her loss of $0.40 per bottle by producing the quantity where price equals to Average Total Cost.