Question

4. Yummy chicken cost revenue statement has following details of their output, cost and revenue from which you are required to analyze the data to evaluate the firm is profit making, or loss making and whether it will continue in business or close down. The growing demand for yummy chicken is increasing, assuming that the demand is 15000 units what will be the price the firm can sell. (10 marks) Table 4: Cost Revenue statement yummy chicken Output Price Total Total Average Marginal Marginal ATC AVC Revenue Cost Revenue Revenue Cost 1000 65 65000 82000 65 2000 43 8600088000 43 3000 35 105000 9500035 18 4000 28 112000 115000 5000 25 125000 130000 257 82 70 44 36 38 25 35 20 30 15 26 12 28 13 18 108000 145000 17 119000 165000 12 6000 7000 18 17 18 24 10 35 45 50 8000 15 120000 188000 15 9000 14 126000 205000 10000 13 130000 225000 11000 12 132000 255000 12000 11 132000 325000 14 13 12 27 30 10 35 11 38 14 0.75 0.5 60

Answer 1

The firm should produce 4000 units because only then the marginal revenue is greater than / equal to marginal cost. At 5000 units, MR is less than MC so firm should reduce its output to 4000 units. Firm should charge a price of $28 per unit but its average cost is $35 per unit. This implies that it is experiencing losses. AVC is $20 per unit at 4000 units which is less than the price of $28 per unit. Hence, it should not shut down.

However, when the demand is 15000 units, it should not produce because the marginal revenue will be negative.