Question

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Question 2 (20 marks) The market of cookie is perfectly competitive in Country X. Fanny Cookies is one of the 300 price-taker firms in producing and selling cookies. The profit-maximizing output level and price of Fanny Cookies are 900 packs of cookies per month and $250 per pack, respectively. The monthly rent and insurance are $65,000 inclusive. The other monthly expenses including salaries of the pastry chef, utilities expense and miscellaneous expenses are summarized in the table below: Total Variable Cost ($) Quantity Produced (Packs of cookies) 0 500 600 700 800 900 1000 40,000 56,000 75,000 95,000 120,000 165,000 (a) Construct ONE new table based on the above data for Fanny Cookies. Calculate the total cost marginal cost, and average total cost at each quantity level. Use the following headings for your table. Calculate the figures and round your answers to integers. No working is required. (3 marks) ($) Quantity Price Total Marginal Average Produced Cost Cost Total (Packs of Cost cookies) (Remarks: Significant mark deduction if this table is broken into 2 parts or 2 tables.) (S) (b) State the profit-maximization rule. Explain whether Fanny Cookies is following the rule to maximize its profit. What is the amount of profit (loss) made by the company? Show your workings. (3 marks) (c) Based on the given information and your answers in parts (a) and (b), draw a set of market-firm diagram for the cookie market in Country Xto include the critical data related to prices, quantities and average total cost at the profit-maximizing output level. Label the area of profit/loss according to the way taught in lecture 3, e.g. area bcfg in the diagram. No explanation is needed. (4 marks) (d) In the last quarter, there was a rise in the insurance paid by Fanny Cookie. At the same time, a recent study indicated that there is a higher chance of heart attack for people having a habit of eating cookies every day. As a result, Fanny Cookies could record a break-even state of profitability. Illustrate this circumstance in the same set of market-firm diagram of part (c). Explain how the market of cookies and individual firms like Fanny Cookies are affected in Country X. (10 marks)

Answer 1

Page 1 Ancouro, a) The loft side table shows the colcolded values and the light so formula view of the Spored sheet in case you are interested to repleate the a л с о | A | B | C | 0 Quantity Produced variable Price Total Morg? Average Quantity (Pack of l. ' values and the right side shows the te vested to replace the calculations B Icio EF AY9 Total no! ($) Cost I lotel variable cost I Total COS Price | ($) Cost Produced (Pack of cookies) cookis & Cost CS cost (0) 250 165.000 1,05,000 -65000+B3 -65000 +83 210 3 Soo 40,000 250 soo Goo 1 - 250 40,000 250 56.000/250 35.000 |200 03-02) 1A3-A2) [121,000 160 202 250 SG000 4 GOO 에매 ton Ice. = (Sooote 104-03 A4-A3 - GSCODES | 200 1,40.000 700 75.000 700 250. - om I to o to 05-04 -Oslas AS-nu 200 800 800 95.000 250 206 95.000 250 1,20,000 350 165,000 250 900 160,000 200 1,85,000 250 12:30000 450 230 (SoootB6 06-05 =0/A6 AGAS - C5000+B7 07-06 goo 250 1,20,000 1,65,000 ATAG 8 1,000 100D 250 - 65000+88 08-07- Deline AB-AT

Page-2 le as mc at quality following the oule to b) For a competitive foom, the profil maximizing sule is Price = AR= MR=MC . In the present case, the Price = 250 is same as me at -900. Hence, the firm is following the malimize Profit At Q=900, Price=250 and average cost = 206. Hence, Profil Per unit of output = 250-206344 and lot Profit = 900* 44 = $40,000 4 c) The above scenario can be as shown in the diagram belowe. - Me Bacel cost /ac AR-MR G - 200 ----- 100 900 output

Page 3 the increase it would avec Cuove may shift upraded d) Due to increase in insurance cost, the average cost will be mooc. Hence, the average fixed cost and average cost would in and the ave dege cost curve mey Shi as shown in the diogrom belowe from AC Ach on the other hand, due to the rest with health risk, the demond in the mo Eesuce and hence Price will be lowed. I other words, the Price Curve will shorts to ARIE MR) A bocak eron level means that price = average cost, that is the forom is able to just cover the average with the price level. As shown in the diagram, at the Profit maximising Cond, (MR=MC), Pice is also equal to the AC, which means that the from is in breakeven Position the morkel lower. In doues АС 7502/ 1 AC - AR: MR AR, EMR, ဒါဝဝ 206 G3900 - output

ge 1 Since Bice is reduced and cost goes up there might be fece fioms who may be able to Coved up their averdage variable cost and mou leave the market and hence the number of from might get reduced PLEASE HIT LIKE VOTE,