Question

The table below shows the daily costs of Cathy's Corn Stand. Cathy sells her corn cobs in a perfectly competitive market. MC (dollars) $2.50 5.00 Cathy's Corn Stand's Production Costs Quantity (corn cobs) AVC (dollars) 8.0 $5.00 0 11. 4 .55 13.0 4.62 14.8 4.75 16.3 4.91 17.7 5.10 18.9 5.29 5.51 ATC (dollars) $12.50 10.00 9.23 8.81 8. 59 8.50 8.47 8.52 6 .45 7.41 9.52 Instructions: In part a, round your answer to one decimal place. In part b, round your answer to two decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. If the market price of corn is $9.52 per corn cob, in the short run how much corn should Cathy produce each day to maximize profits? corn cobs per day b. What are Cathy's profits/losses per day if she produces the profit-maximizing quantity of corn in the short run (losses are expressed as a negative number)? $ c. In the short run, assuming nothing else changes, Cathy should: shut down, because the market price is above the AVC. produce a lower quantity of corn per day. produce the same quantity of corn per day. produce a greater quantity of corn per day. < Prev 5 of 7 Next >

Answer 1

V to know nupetitive that in the short run for a perfectly market, the profit maximising point is given by: 1 ИП In 9 Marginal cost & Price worMC Episode sime, price is exogeneously given to a competitive firm, in this case, Marginal Revenue (MR) = Price (P)). . If the market price of corn is $9.52 per corn cob, in the short run, amount of corn cathy should produce each day, to maximize profits, will be hang on At, P = Me = $9.52, "I shows three 1 guantity (9) = 20 corn cobs per day ... 1)At f= $95 At p = $9.52 per corn.cob anal D = 20, Total Revenue : TR = P Q = 1$ (9:52 *20) = $19014 Total Cost : Te = ATC:X 9 = $ (3,52 x 20) 1. = $ 170.4.1, ii Profit: T1 = TR - TC.= $ (190.4-170.4) . - $ 20 :: : If Cathy produces the profit-maximizing quantity of corn in the short-run, then her per day profits will be : $20 2) In the short ron, assuring nothing else changes, Catly should o produce a greater quantity of corn per day.

This is because, given the above scenario, in the short-run, Cathy's, Average cost (ATC) is less than the average Revenue (AR), 1.0, P (sime, in perfectly competitive market, P=AR), and home there is scope for further frofit maximisation, fors which will eventually be achieved in the long-run. Moreover, we it must be ensured that the firm has the capacity to produce more output (greater than a 20 corn cobs) per day].' d) A perfectly competitive firm shuts down at a point, where, ww Price (P) < minimum of Average variable: Lo cost (Ă VC) ne; p < min (AVC). Here, from the ginen table, we have mininum AVC = $ 4.55 . if the short-run price of corn falls to $3.33 per Соти соb, Hи, P (= $3133) < min AVC ( = $4.55): Hence, cathy should to shut down because the market price is below the Ave.