QUESTION 7 Liz produces lemonade in a perfectly competitive market Her only fixe

Question

QUESTION 7 Liz produces lemonade in a perfectly competitive market Her only fixed cost is the rent she pays for her factory. Which of the tollowing statements are false Liz's average fixed costs are constant. If the quantity produced increases, Liz's average fixed cost ill increase. An increase in marginal cost can only be caused by changes in variable cost. The average total cost curve will intersect the minimum ot the average variable cost curve QUESTION 8 Ted is a producer in the perfectly competitive market for sandwiches. Ted produces his profit-maximising quantity of 55 sandwiches at the market price of $4.00 per sandwich. At this output, his average variable cost is $2.80 per sandwich and his average total cost is $3.10 per sandwich. His minimum average variable cost is $2.70 per sandwich Select the item trom the list provided to make the following statements true 1. $0.30 2. $4.00 per sandwich 3. $154 4. $170.50 The total variable cost Ted will incur at his profit maximising production level is Ted's average fixed cost at his profit maximising production level is If the market price begins to drop below $4.00 per sandwich, and Teds costs remain unchanged, Ted ll 5 $154 per sandwich 6. $49.50 7. $1.10 per sandwich 8. $0.30 per sandwich 9. $148.50 10. 50.40 per sandwich 11. 53.10 per sandwich 12. 52.70 per sandwich need to shut down if the market price falls to belonw

Explanation / Answer

(Question 7)

Following statements are false:

- Average fixed costs are constant

- If quantity produced increases, average fixed costs will increase

- Average total cost curve will intersect the minimum of average variable cost curve

(Question 8)

(a) Total variable cost = $154

(Total variable cost = Average variable cost (AVC) x Output produced = $2.8 x 55 = $154)

(b) Average fixed cost = $0.3

(Average fixed cost = Average total cost - Average variable cost = $3.1 - $2.8 = $0.3)

(c) Ted will shut down if price fall below $2.70 per sandwich.

(A perfect competitor will shut down in short run if price falls less than the minimum average variable cost, in this case which is $2.7 per sandwich)

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