Question

The table below represents the costs for a computer company for a week (sorry, they're not very 1) realistic). Quantity Fixed Costs Variable Total Costs Average Average Marginal Costs Total Cost Variable Cost Costs $1000 $1000 $1000 $1000 $1000 $1000 $1000 $1000 1 $600 2 $1100 3 $1500 $1800 $2200 $2700 $3400 $4500 6 7 Complete the missing information in the table. a. b. At what price would the company shut-down in the short run? 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? Assume the cost structure of this firm is typical for this industry. Do you expect firms to c. d. enter or exit the market? Why or why not? How will this affect profits of this firm? Assume that this is a constant cost industry. What do you expect the price for a computer e. to be in the long run? Explain how you know.

Answer 1

a)
	Total costs
Output	Total Costs	Total Fixed costs $	Total Variable Costs $	Average Total Costs $	Average Variable Costs $	Marginal Costs $
	TC $	TFC $	TVC $	ATC $	AVC $	MC $
1	1600	1000	600	1600.00	600.00
2	2100	1000	1100	1050.00	1100.00	500.00
3	2500	1000	1500	833.33	1500.00	400.00
4	2800	1000	1800	700.00	1800.00	300.00
5	3200	1000	2200	640.00	2200.00	400.00
6	3700	1000	2700	616.67	2700.00	500.00
7	4400	1000	3400	628.57	3400.00	700.00
8	5500	1000	4500	687.50	4500.00	1100.00
Total cost = Fixed Cost + Variable costs
Fixed cost is the same for all quantity produced.
Variable costs is total costs minus fixed costs.
Variable costs varys with output.
Average Fixed cost= Total Fixed Cost/Quanity
Average variable cost= Total variable Cost/Quanity
Average total cost= Total Cost/Quanity
Marginal cost is additional cost due to the production of one more unit.
b)
Shut down point in the short run is minimum AVC.
The shut-down point is the minimum SAVC. A firm will supply as long as its minimum SAVC is covered. This will minimize the economic loss as the fixed costs are already incurred
$600 is the minimum AVC.
c)
In the long run, a competitive firm is in equilibrium when MR=MC=AC. It will produce that output where LMC=LAC. Because if P is less than AC, the firm is suffering a loss.
In the long run, the firm will produce 7 computers for a week. MR= P for a competitive firm.
The total revenue will be P x Q= $750 x 7 = $5,250.
Total cost is $4400. Profit = TR-TC= $5250-$4400=$850.
d)
Economic profit = Total revenue – total costs ( implicit + explicit)
Economic profit is $850. Firms will enter the industry as the existing firms are making an economic profit.