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In: Economics

1. EverKleen Pool Services provides weekly swimming pool maintenance in Atlanta. Dozens of firms provide this...

1. EverKleen Pool Services provides weekly swimming pool maintenance in Atlanta. Dozens of firms provide this service. The service is standardized, each company cleans the pool and maintains the proper levels of chemicals in the water. The service is typically sold as a four-month summer contracts. The market price for the four-month service is $125. EverKleen Pool Services has a fixed cost of $3,500. The manager of EverKleen has estimated the following cost function:

SMC = 125-0.42Q+0.0021Q2

Where SMC is measured in dollars and Q is the number of pools serviced each summer.

a. At what output level does AVC reach its minimum value? What is the value of AVC at its minimum point? (10 pts)

b. Should the firm continue to operate or shut down? Explain why? (15 pts)

c. What is the optimal output level? Make necessary calculations and clearly highlight the optimum level (15 pts)

d. How much profit/loss can the manager of the firm expect to earn? (5 pts)

e. The fixed costs rise to $4,000. What is the effect of such an increase? Explain. (5 pts)

Solutions

Expert Solution

Rahul Sunny answered 8 months ago
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