Jerry is operating at his level of output, which maximizes profit. He can change
ID: 1233646 • Letter: J
Question
Jerry is operating at his level of output, which maximizes profit. He can change locks for 20 different customers per day and charges each customer $35 for each lock. His total cost of changing locks is $800 and his fixed cost is $160.Answer the following questions. For each question, show the formula and the calculation as well as the final answer.
a. What is the marginal cost for Jerry? Explain how you arrived at that answer.
b. Calculate profit.
c. Advise Jerry regarding his short-run decision to produce. Explain how you arrived at that answer.
d. Advise Jerry regarding his long-run decision to produce. Explain how you arrived at that answer.
Submission Requirements:
Please show Formulas and calculations must be shown along with the final correct answer.
Thank you
Explanation / Answer
a) Jerry's marginal cost is equals to the market price. This is the condition for a perfect competition industry where firms have no market power and produces at the point P=MC. Therefore his MC is $35
b) Profit = TR-TC = 20*35 - 800 = -100
c) TC = 800
FC = 160
VC = 800 - 160 = 640
AVC = 640/20 = 32
Since P>AVC, he should continue to produce. This is because although he is making a loss, producing an output of 20 can still cover his variable cost and earn back some of his fixed cost. He is better of producing as he needs to pay his fixed cost regardless on whether he produces or not. Therefore, producing is the better option.
d) ATC = 800/20 = 40
Since P > ATC, he should not produce. In the long run, fixed costs can be considered as variable costs. Since the price he charges cannot pay off the average total cost, he should not produce as this will incure long-term loss.
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