Question

1) The table below represents the costs for a computer company for a week (sorry, they're not very realistic). Quantity Fixed Costs Variable Total Costs Average Average Marginal Costs Total Cost Variable Cost Costs $1000 $600 $1000 $1100 $1000 $1500 $1000 $1800 $1000 $2200 $1000 $2700 $1000 $3400 $1000 $4500 a. Complete the missing information in the table. b. At what price would the company shut-down in the short run? C. Suppose this economy is operating in a perfectly competitive market. If the market price of a computer is $750, how many computers will the firm want to produce and sell to maximize profit? How much profit will the firm get? d. Assume the cost structure of this firm is typical for this industry. Do you expect firms to enter or exit the market? Why or why not? How will this affect profits of this firm? e. Assume that this is a constant cost industry. What do you expect the price for a computer to be in the long run? Explain how you know.

Answer 1

Q	FC	VC	TC	ATC	AVC	MC
1	1000	600	1600	1600	600	600
2	1000	1100	2100	1050	550	500
3	1000	1500	2500	833.3333	500	400
4	1000	1800	2800	700	450	300
5	1000	2200	3200	640	440	400
6	1000	2700	3700	616.6667	450	500
7	1000	3400	4400	628.5714	485.7143	700
8	1000	4500	5500	687.5	562.5	1100

a) TC=FC+VC

ATC=TC/Q

AVC=VC/Q

MC=change in TC/change in Q

b) The company will shut down at any price below its minimum AVC = 440

c) P=750

The firm will set P=MC for profit maximization so it will produce Q=7 units

profits = TR-TC = (750*7)-4400 = 850

d) More firms will enter the market in the long run as the industry is earning positive profits.

As more firms enter, the supply increases which decreases the price until it is equal to the minimum ATC so the profits becomes zero in the long run and the firms only earn normal profits.