Question

QUESTION 10 Every year at the Brisbane Exhibition (the 'Ekka), hundreds of vendors sell Showbags containing an assortment of goods. Assume the market for Ekka Showbags is perfectly competitive. Kelly is a producer in the Showbag market, selling her Showbags at the market price of $5.00. At the profit-maximising output level of 46 Showbags, Kelly's average total cost is $4.20 per Showbag. The minimum average variable cost is $3.70 per Showbag. Answer the following questions: a. Kelly's economic profit or loss is 36.80 (use a negative value if a loss). Answer in dollars, rounded to two decimal places (ie: to the nearest cent b. State whether the following statement is true or false: "At the profit-maximising quantity, Kelly is making an economic profit of $1.30 per Showbag." Type T for true, or F for false F c. State whether the following statement is true or false: "Kelly should shut down if the market price is $3.69 per Showbag." Type T for true, or F for false F

If you could, please explain a. and b.

Answer 1

a)

Explanation: Price per Showbag : $5

Average Total cost cost: $4.20 per Showbag, Please note Average total cost is the cost which includes both Average fixed cost and Average variable cost.

Average variable cost: $3.70 per Showbag

Profit maximisation output: 46 Showbags

Total profit maximising revenue: 46x5= $230

Total Average cost for 46 Showbags= 46x4.20= $193.2

Profit maximising economic profit= $36.80

Economic profit is the profit when firm is earning super normal profit, it means it earns extra dollars after deducting its total cost of production, which is more than its total cost of $193.2

Firm/firms mainly earn economic profit in the short run since in short run it is not possible for new firms to enter the market and increase the competition and decrease the price.

b) Answer F-False

Explanation- As per calculations done in (a) above total revenue is $230 & total cost is $193.2 and economic profit is $36.80 and total number of profit maximising Showbags sold is 46, In order to calculate economic profit per Showbag we will have to divide economic profit by quantity of Showbags sold, so here it is below.

Economic profit per Showbag= 36.80/46= $0.80 per Showbag

c)T=True

Explanation a firm has to shut down its operations if it is not able to recover its AVC(Average Variable Cost) in the short run.

Firms AVC= $3.70 per Showbag

Market price= $3.69 per Showbag

Quantity sold: 46 Showbag

Total Revenue= P(Price)x Q(Quantity)= 3.69x46=$169.74

Total Average Variable Cost= AVC per Showbag x Quantity sold= 3.70 X 46= $170.2

So one can see that firms total average variable cost $170.2 is higher than its total revenue $169.74, so it is not able to recover its total average variable cost in the short run, so Kelly/firm will shut down its operations if it is not able to recover its average variable cost.