Question

Quantity (gallons) Total Cost ($) Average Total Marginal Cost Cost ($) ($/gallon) 0 9 1 10 2 13 3 18 4 25 5 34 a. Compute each producer's marginal cost and average total cost for 1 to 5 gallons. b. The price of a gallon of milk is now $10. How many gallons are sold? How many gallons does each producer make? How many producers are there? How much profit does each producer earn? c. Is the situation described in part (b) a long-run equilibrium? Why or why not? Suppose that in the long run there is free entry and exit. d. How much profit does each producer earn in the long-run equilibrium? What is the market price? How many gallons does each producer make? How many gallons are sold in the market? How many producers are operating? O RE FS F10 F11 1425 0 E R O P

Answer 1

Answer

a.

TC MC 0 1 10 1 ATC 9 10 13 18 25 34 6.5 3 N 3 6 5 4 7 6.25 6.8 5 9

ATC = TC/Q

MC = TC x - TC x-1

b.Gallsons sold 500 ;each firm makes 5 gallons; 100 firms in market ; $16 profit of each firm

At price 10 quantity demanded is 500

The firm would be selling at MC = $9 as it is closest to $10

Therefore each firm will supply 5 units

No. of firms = 500 / 5 = 100

Profit by each producer = (10-6.8) x 5 = $16

c. No. B is not a long run equilibrium as frims will produce at MC=ATC=P=$10 in the long run. Thus wthey will try to adjust costs accordingly.

d. Each producers earns zero profits . Market price will remain at $10. Each producer will make higher than 5 units , in this case itcannot be determined with the information given. The whole 500 gallons will be sold in the market. Number of producers cannot be determined with the information given , but it will be greater than 100 firms.

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