Question

The table below shows the daily costs of Cathy's Corn Stand. Cathy sells her corn cobs in a perfectly competitive market. Cathy's Corn Stand's Production Costs Quantity (corn cobs) AVC (dollars) 10.00 $2.50 20.00 2.25 30.00 2.00 40.00 1.81 50.00 1.70 60.00 1.67 70.00 1.68 80.00 1.75 90.00 ATC (dollars) $5.00 3.50 2.83 2.44 2.20 2.08 2.04 2.06 2.14 MC (dollars $2.50 2.00 1.50 1.25 1.25 1.50 1.75 2.25 2.75 a. Draw Cathy's marginal cost (MC) curve. Instructions: Use the tool provided 'MC' to plot the curve point by point (8 points total). Cathy's Corn Stand's Production Costs 5.00 Tools Price (dollars) -- NN

Answer 1

Price, MC, AVC, ATC -4.5 3.5 ATC 25 AVC MC -1.5 -0.5 Quantity 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85

a) The green line shows the MC curve.

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b) Market equilibrium occurs at,

Price = Marginal Cost.

When price is 1.75$.

Marginal cost is equal to $1.75 when the quantity demanded is 70.

The profit maximising output is 70.

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c) Profit = Total Revenue - Total Cost = TR - TC

TR = Price * Quantity

TR = 1.75 * 70 = 122.5

TC = ATC * Quantity

TC = 2.04 * 70 = 142.8

Profit = 122.5 - 142.8 = - 20.3$

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d) Since in this case the price lies above the minimum point of the AVC curve, she should produce the profit maximising quantity of ouput that is 70. Though she earns a negative profit, a surplus from total revenue is left over that helps to mitigate a part of the fixed cost.

The correct answer is, produce the same quantity of corn per day.

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e) The minimum point of AVC is known as the shut down point and a firm should stop its production process if the price equals or lies below the minimum point of the AVC curve as it incurs pure economic losses.

Here the minimum point of AVC is $1.67 and any price equal or below it incurs pure economic losses.

The correct answer is, shut down, because the market price is below the AVC.