Question

7. Utilizing the following Christmas Tree production function that you had completed in Homework 2 that includes output and cost information for a firm, respond to the questions given, assuming the firm is a perfectly competitive firm: Input (Units of Water) Output Christma Trees) 70 7.5 7.5 MPP | TFC | TVC | C | AFC | AVC | ATC | MC 45000 4500 45003500800064.29 50.00 114.29 50.00 4500 7000 11500 31.0348.2879.31 46.67 4500 10500 15000 20.4547.7368.18 46.67 4500 14000 18500 15.52 48.28 63.79 50.00 4500 17500 22000 13.04 50.7263.77 63.64 4500 21000 25500 11.3953.16 64.5670.00 4.5 4500 24500 29000 10.2355.6865.91 77.78 4500 28000 32500 9.38 58.33 67.71 87.50 3.5 4500 31500 36000 8.74 61.17 69.90 100.00 3 4500 35000 39500 8.26 64.22 72.48 116.67 480 515 545 A. Assume that the selling price for Christmas Trees is $80/tree. What would be the approximate profit maximizing rate of output that you would want to produce? Would the firm be generating profit above all costs at that selling price? Why or Why not? B. If the price of Christmas Trees drops to $60/tree, approximately how many trees would now be produced for the optimum level? Are you making profit above all costs at $60/tree? Why or Why not?

Answer 1

A) Setting P=MC, the firm will produce Q = 440

Yes, the firm is generating profits as P>ATC

B) Setting P=MC, the firm would produce Q = 290 units

The firm will make profits since P>ATC

C) The firm will breakeven when the P=Minimum ATC = 63.77

The shutdown point is the minimum AVC = 47.73