a) Suppose that the market for 2% milk is competitive with a unit price of $5.00
ID: 1096503 • Letter: A
Question
a) Suppose that the market for 2% milk is competitive with a unit price of $5.00. and the table below characterizes an individual firm. Fill in the blanks. (12.5 points) Quantity FC VC IC ATC AVC MC MR TR Profit 1 $30 $2 1 $30 $5 3 $30 $9 4 $30 $14 5 $30 $20 6 $30 $27 7 $30 $35 b) How many units of 2% milk will this firm produce in this market? Why? (3.5 points) c) How much profit will the firm have in this market? Will it shut down in the short run? Will it exit the market in the long run? Justify your answers. (8 points)Explanation / Answer
(a)The following table shows various cost and revenue of a firm:
(b) The firm will produce where MR=MC. This happens at quantity 4 where MR=MC=5.
(c) The firm is earning negative profits or loss of 24. The firm will shutdown since the there are losses. The sutdown point is when P<ATC. The firms will exit the market when P<AVC. Here AVC is 3.5 at output 4 as shown in the below table. Therefore firm will not exit the industry but shutdown the production for sometime.
Q FC VC TC(FC+VC) ATC (TC/Q) MC TR (p*q) MR Profits (TC-TR) 1 30 2 32 32 5 -27 2 30 5 35 17.5 3 10 5 -25 3 30 9 39 13 4 15 5 -24 4 30 14 44 11 5 20 5 -24 5 30 20 50 10 6 25 5 -25 6 30 27 57 9.5 7 30 5 -27 7 30 35 65 9.28571429 8 35 5 -30Related Questions
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