Question

Ethel Simpson owns Fine Lines, a furniture company in Boone, NC. Among other products, Fine Lines produces rocking chairs. Assume this is a competitive industry. Fine Lines’ total cost of producing rocking chairs per day is related to production of rocking chairs per day as follows.

Fine Lines
Quantity of Rocking Chairs	Total Cost	TFC	TVC	ATC	AVC	MC
0	$500
1	1,000
2	1,300
3	1,500
4	1,800
5	2,200
6	2,700
7	3,300
8	4,400

1. Assume the market price is $650 per rocking chair. (In computing quantities, assume that Fine Lines produces only a certain number of completed chairs each day; it does not produce fractions of a chair on any day.)

(1) How many rocking chairs should Fine Lines produce?

(2) How much profit will Fine Lines make?

(3) Draw a graph to illustrate your answer. Your graph should be clearly labeled and should include Fine Lines’ demand for rocking chairs and the ATC, AVC, MC and MR curves, the price Fine Lines is charging, and the quantity of rocking chairs Fine Lines is producing. (I don’t care if you draw to scale, but I do want your graph to show the correct relationships between the cost curves and the market price and among the different cost curves.) Either on your graph or verbally, indicate the area that identifies the profit or loss.

2. Assume the market price falls to $450. Answer the same 3 questions I asked in part A.

3. Assume the market price falls to $350. Answer the same 3 questions I asked in part A.

4. Assume the market price falls to $250. Answer the same 3 questions I asked in part A.

(Question 1 continues on the next page)

5. The table below shows Fine Lines’ supply schedule for Rocking Chairs. Please fill in the table with your answers from A, B, and C above. Fill in the remainder of the table to complete the supply schedule.

Price	Quantity of Chairs Produced	Economic Profit/Normal Profit/Loss/Shut Down
$250
$350
$450
$550
$650

6. Suppose the demand curve in the market for rocking chairs is given by the information in the following table. Fill in the market supply for chairs. Remember that there are 1,000 identical firms in this industry. What is the equilibrium price? The equilibrium quantity?

Rocking Chair Market
Price	Quantity Demanded of Chairs	Quantity Supplied of Chairs
$250	10,000
$350	8,000
$450	7,000
$550	6,000
$650	5,000

7. In the short run, at the equilibrium market price, are firms in the industry operating with an economic profit or a normal profit or a loss or should the firm shut down? Please explain your answer.

8. In the long run, will the number of firms in the industry change? Please explain.

Answer 1