Question

i saw someone previoisly asked this question, but the answer was not clear.

Given the following cost table of the firm: Tomatoes Quantity (bushels) Total Costs TC Variable Marginal Average Average Cost Cost Variable Cost Total Cost MC AVC ATC 16.00 11.00 10.00 10.50 11.60 13.00 14.57 30.00 18.00 14.67 14.00 14.40 15.33 16.57 92 116 102 24 a) what is the profit maximizing level of output IF the market price is $20? b) Is the firm earning economic profits or losses? c) What is the value of its profits or losses? d) Suppose demand shifts left in the market and the market price falls to $12 a bushel. What is the profit maximizing level of output now? e) Is the firm earning economic profits or losses now and what is the value of these profits or losses? 1) What would the market price have to fall to for the firm to be indifferent between staying open and shutting down?

Answer 1

(a)

The market price is $20.

The firm will maximize profit when it produce that level of output corresponding to which the market price equals the marginal cost.

The market price equals the marginal cost corresponding to 6 bushels of tomatoes.

So,

The profit-maximizing level of output is 6 bushels of tomatoes.

(b)

At output level of 6 bushels of tomatoes, average total cost is $15.33

The market price is $20.

When the market price exceeds the average total cost at the level of output produced then firm earns economic profit.

So,

The firm is earning economic profits.

(c)

Calculate the profit -

Profit = [Market price - Average total cost] * Profit-maximzing output

Profit = [$20 - $15.33] * 6

Profit = $28.02

The value of its profit is $28.02

(d)

Due to the leftward shift of demand, the market price has decreased.

The new market price is $12.

The market price equals the marginal cost corresponding to the output of 4 bushels of tomatoes.

So,

The profit-maximizing level of output now is 4 bushels of tomatoes.

(e)

At the output level of 4 bushels of tomatoes, the average total cost is $14.

The market price is $12.

When the market price is less than the average total cost at the level of output produced, firm earns economic loss.

So,

The firm is earning economic losses now.

Calculate the economic loss -

Economic loss = [ATC - Market price] * Output produced

Economic loss = [$14 - $12] * 4 = $8

So,

The value of losses is $8.

(f)

The firm is indifferent between staying open and shutting down when the market price is equal to minimum average variable cost.

The minimum AVC is $10.

So,

The market price would have to fall to $10 for the firm to be indifferent between staying open and shutting down.