Question

5. Deriving the short-run supply curve Aa Aa Consider the perfectly competitive market for halogen ceiling lamps. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry. COSTS Dollars per lampl 100 MC 90 80 70 60 ATC AVC 50 40 30 20 10 0 4 8 12 16 20 24 28 32 36 40 QUANTITY OF OUTPUT (Thousands of lamps) For each price in the following table, use the graph to determine the number of lamps this firm would produce in order to maximize its economic profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero units and the profit-maximizing quantity. Also, indicate for each price whether the firm will produce, shut down, or be indifferent between the two in the short run and whether it will make a profit, suffer a loss, or break even. Price (P) Quantity (Q) Produce or Shut Down? Profit or Loss?

Answer 1

A perfectly competitive will shutdown short-sun supply that if the the P <Avc the shost-sun postion of above Avc. • the Curve lies curve Price Q (thousand) Profit / Loss lo Less Is o 25 Produce/shutdown shut down e shut down shut down produce produce produce produce Loss Loss 35 oor 16 50 20 Breakeven 70 24 90 28 Profit if then profit P > ATC PC ATC Pa ATC then loss then zero economic l.e., na normal poogit profit. Price(a) Too supply Coutput) 18 60 yo lo 8 Camlin 40 24 Quantity