(20 points) Consider a profit maximizing firm that manufactures ball point pens
ID: 1191573 • Letter: #
Question
(20 points) Consider a profit maximizing firm that manufactures ball point pens in a competitive market. We will assume that this firm has a small amount of fixed cost ($75) which it must incur regardless of the level of production. The variable cost, consisting of materials and labor, changes along with production levels. Please fill in the entries in the following cost table:
Total Total Average Average Average
Production Variable Fixed Total Marginal Total Variable Fixed
Quantity Cost Cost Cost Cost Cost Cost Cost
(pens) ($) ($) ($) ($/pen) ($/pen) ($/pen)___($/pen)
0 0 $75 $75 ------ ------ ------
____
30 60 ____ ____ ____ ____ ____
____
90 120 ____ ____ ____ ____ ____
____
130 180 ____ ____ ____ ____ ____
____
155 240 ____ ____ ____ ____ ____
____
172 300 ____ ____ ____ ____ ____
____
185 360 ____ ____ ____ ____ ____
(6 points) Show the MC, ATC, AVC, and AFC curves on a graph. Identify the minimum AVC and ATC. (A hand drawn graph is fine as long as it is legible.)
Hint: Note that the marginal cost is shown between two production quantities. You should plot this MC at the midpoint of each quantity range. For example, for the MC between the first two quantities, plot your value at Q = 15.
(2 points) If the equilibrium price in the market for ball point pens is $1.75, will this firm choose to operate in the short run? Explain why or why not.
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(2 points) If the equilibrium price in the market for ball point pens falls to $1.25, what will the firm choose to do and why?
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#4 is the only question I need answered
Explanation / Answer
Question - 4
When P = $1.75, Price exceeds AVC in the output range of 90 to 172 units. Therefore, firm will choose to operate at this range of output in the short run where price covers its average variable cost.
But when P = $1.25, as seen from calculations below, Price is lower than AVC at each level of output, and there is a loss at each level of output. Therefore, firm will shut down in the short run and exit the market, since there is a consistent loss at each level of output.
Q TVC TFC TC MC AVC TR at P = 1.75 Profit at P = 1.75 TR at P = 1.25 Profit at P = 1.25 0 0 75 75 - - 0.00 -75.00 0.00 -75.00 30 60 75 135 2.00 2.00 52.50 -82.50 37.50 -97.50 90 120 75 195 1.00 1.33 157.50 -37.50 112.50 -82.50 130 180 75 255 1.50 1.38 227.50 -27.50 162.50 -92.50 155 240 75 315 2.40 1.55 271.25 -43.75 193.75 -121.25 172 300 75 375 3.53 1.74 301.00 -74.00 215.00 -160.00 185 360 75 435 4.62 1.95 323.75 -111.25 231.25 -203.75Related Questions
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