Question

4. The table below represents cost data for Vester, Incorporated, which sells tennis balls in a perfectly competitive market for a price of $4 per package: 0 Output (packages/minute) Total Fixed Cost ($) Total Variable Cost (5) 0 1 1 1 7 2 1 9 3 13 4 19 1 1 5 29 How many units of the output will this firm produce? How much profit will it earn? Will the firm choose to operate in the short run? Will the firm choose to operate in the long run? Explain.

Answer 1

Total Cost = Total Fixed Cost + Total Variable Cost

Marginal Cost is change in total cost when output rises

Total Revenue = Price * Quantity

Marginal Revenue is change in total revenue when output rises

Firm will produce at a point when marginal revenue = marginal cost which occurs when output level is 3 units. Profit at this level is -2. A erage variable cost at this output level is (13 / 3) = 4.33 which is more than the price they receive. Thus, firm will not operate in short run. In long run, there would be no fixed cost while total cost = total variable cost. Average variable cost in long run would be (14 / 3) = 4.66 while price would be same, thus would not even produce in long run.

Output 0 Total Fixed Cost Total Variable Cost Total Cost Marginal Cost Total Revenue Marginal Revenue Profit 1 0 1 0 -1 7 1 8 1 7 4 4 -4 10 2 1 9 2 8 4 -2 1 13 14 4 12 3 4 -2 20 16 19 6 4 1 4 -4 30 10 20 29 5 --10 4 1