Smiling Cow Dairy can sell all the milk it wants for $4 a gallon, and it can ren

Question

Smiling Cow Dairy can sell all the milk it wants for $4 a gallon, and it can rent all the robots it wants to milk the cows at a capital rental price of $100 a day. If faces the folling productions schedule:
Number of robots and Total products
0 robots 0 gallons
1 robot 50 gallons
2 robots 85 gallons
3 robots 115 gallons
4 robots 140 gallons
5 robots 150 gallons
6 robots 155 gallons
a. In what kind of market structure does the firm sell its output? how can you tell?
b. In what kind of market structure does the firm rent robots? how can you tell?
c. Calculate the marginal product and the value if the marginal product for each additional robot.
d. How many robots should the firm rent? Explain

Explanation / Answer

A. Perfectly competitive because it can sell all it wants at $4 per gallon. B. You don't know. All you know is that it faces a constant marginal cost of $100. This does not imply anything about the market structure of the robots industry, except that there is no price-discrimination. C. In the same order as the graph, the MPK and the VMPK are 0 0 50 200 35 140 30 120 25 100 10 40 5 20 D. The firm should buy four robots because that is when the rent is equal to VMPK.

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