Kate’s Katering provides catered meals, and the catered meals industry is perfec
ID: 1250417 • Letter: K
Question
Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost is comprised of the wages paid to the cooks and the food ingredients.The variable cost associated with each level of output is given in the accompanying table.
Qty. of Meals || VC
0...............|| $0
10.............|| $200
20.............|| $300
30.............|| $480
40.............|| $700
50.............|| $1000
a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.
Quantity of meals || FC || VC || TC || MC || AVC || ATC
0.....................||$100 || $0
10....................||100 || 200
20....................||100 || 300
30....................||100 || 480
40....................||100 || 700
50....................||100 ||1,000
b. What is the break-even price?
What is the shut-down price?
c. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, will Kate earn a profit?
In the short run, should she produce or shut down?
d. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, will Kate earn a profit?
In the short run, should she produce or shut down?
e. Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, will Kate earn a profit?
In the short run, should she produce or shut down?
Thank You for helping me with these questions in advance!
Explanation / Answer
a. Total Cost = FC + VC
MC = (VC new-VC old)/(Change in Quantity of meals).
AVC = (VC)/(Quantity of Meals)
ATC = TC/(Quantity of Meals)
Quantity of meals || FC || VC || TC || MC || AVC || ATC
0.....................||$100 || $0 100 NA NA NA
10....................||100 || 200 300 20 20 30
20....................||100 || 300 400 10 15 20
30....................||100 || 480 580 18 16 19.3
40....................||100 || 700 800 22 17.5 20
50....................||100 ||1,000 1100 30 20 22
b. Break even price is where profit is 0. This occurs at minimum ATC. This is always true in perfect competition and is a rule. Therefore the break even price is $19.3
Shut down price is when Total Revenue is less than the minimum AVC. The minumum AVC is $15, so this is the shut down price.
c. Yes, she makes profit. $21 is above the break even price of 19.3 dollars. She should produce.
d. She will not make a profit, she will take a loss. $17 is less than the break even price $19.3. She should NOT shut down though, because this is not below the minium AVC ($15). She should produce.
e. She will not take a profit, she will take a loss, because the price $13 is below the break even price of $19.3. She should shut down because the price is below the shut down price of $15.
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