Question

Duane breeds canary birds for a living. He operates in a perfectly competitive industry. Production costs for Duane are as follows: Output TVC MC AVC ATC 104 34.7 - maino 27.5 110 130 7 150 196 8 190 236 24 29.5 a. Presently, a canary sells for $37. How many birds should Duane breed per month? What are his profits or losses? b. Due to a change in demand, the price of canaries changes to $24. What is Duane's profit maximizing output level? Profits or losses? c. At the price of $24, should he produce or shut down in the short run? Explain. d. What is the lowest price at which Duane will produce in the short run (=the shut down point)? What are profits or losses equal to at the shut-down point? e. What is the long run equilibrium price, output and profit in Duane's industry?

Answer 1

Output	TVC	TC	MC	AVC	ATC	Profit at P=37	Profit at P=24
0	0	46				-46	-46
1	30	76	30	30	76	-39	-52
2	50	96	20	25	48	-22	-48
3	58	104	8	19	34.7	7	-32
4	64	110	6	16	27.5	38	-14
5	84	130	20	17	26	55	-10
6	114	160	30	19	26.7	62	-16
7	150	196	36	21	28	63	-28
8	190	236	40	24	29.5	60	-44

a. Under a perfect competition in short run, the profit gets maximised where MC=MR or where both are nearly equal and here number of canary birds equal to 7 per month. So the profits = $63

b. At P=24, profit maximising output = 5 and the losses = -$10

c. As the price = $24 is greater than AVC at loss minimising level of output = 5, the firm can continue to produce in short run

d. The lowest price = $16 is the short run shut down point (minimum AVC level = $16) and the losses = -$14

e. The long run equilibrium price is where ATC is minimum and is $26, output is 5 and the economic profit = 0