Question

4. Suppose a factory produces inter-lock paving blocks for sale, which requires a building and a machine that produces blocks. A firm rents a building for Rs. 50,000 per month and rents a machine for Rs. 30,000 a month. Those are his fixed costs. His variable cost per month is given in the table below. Quantity of Blocks Variable cost (Rs.) 0 1000 5000 2000 8000 3000 10000 4000 14000 5000 19000 6000 27000 7000 40000 8000 60000 9000 90000 10000 135000 a. Calculate factory's average fixed cost per block, average variable cost, marginal cost and average total cost, for each quantity of output (add four columns to the above table and fill out the cells). (5 marks) There is free entry into the industry, and anyone who enters will face the same costs as anybody else in the market. Suppose that currently the price of a block is Rs. 30. i. What will Factory's profit be? (2 marks) ii. Is this a long-run equilibrium? If not, what will the price of blocks will be in the long run? (2 marks) C. Assume that production of inter-lock blocks is a perfectly competitive industry. For each of the following questions, explain your answers. i. What is factory's break-even price? What is his shut-down price? (4 marks) ii. Suppose the price of a block is Rs. 5. What should the factory do in the short run? (4 marks) Suppose the price of a block is Rs. 10. What is the profit-maximizing quantity of blocks that should be produced? What will factory's total profit be? Will the factory produce or shut down in the short run? Will the factory stay in the industry or exit in the long run? (4 marks) Suppose instead that the price of a block is Rs. 25. Now what is the profit-maximizing quantity of blocks that the factory should produce? What will the total profit be now? Will the factory produce or shut down in the short run? Will the factory stay in the industry or exit in the long run? (4 marks)

Answer 1

Answer the cost factory's average Rixed cost per marginal cost and averago total a) As per the data block average variable cost: | quantity of variable blocts | Cot fixed cost AFC AVC te me 8000 6 80000 1000 5000 80000 85000 5000 2000 8000 80000 88000 3000 3000 10000 80000 3. 33 29.99 90000 2000 4000 14000 80000 3.56 03.50 90000 4000 5000 19000 80000 3,80 119.80 99000 5000 6000 270 00 80000 13.33 4.55 117.93 107000 8000 7000 40000 80000 5.71 17.13 120000 13000 8006 60060 8000D 7.50 17.50 140000 20000 9000 90000 80000 18-88 170000 30000 10000 13500080000 13.50 21.50 215000 45000