Question

In: Economics

Ethel Simpson owns Fine Lines, a furniture company in Boone, NC. Among other products, Fine Lines...

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 the 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.

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

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

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

(Question 1 continues on the next page)

  1. The table below shows the 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

  1. 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

  1. 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.
  1. In the long run, will the number of firms in the industry change? Please explain.

Solutions

Expert Solution

Sol (A) :

Quantity TC TFC TVC AVC ATC MC
0 500 500 - - 0 -
1 1000 500 500 500 1000 500
2 1300 500 800 400 650 300
3 1500 500 1000 333.33 500 200
4 1800 500 1300 325 450 300
5 2200 500 1700 340 440 400
6 2700 500 2200 366.67 450 500
7 3300 500 2800 400 471.42 600
8 4400 500 3900 487.5 550 900

(1) If price is $650 , then firm should produce till 7 units of chair. Because ofnthe following reason :

  • Producer is in equilibrium when , Marginal Revenue and Marginal cost are equal to each other. And Marginal cost is decreases after equilibrium.
  • So , Price = MR = $650 and MC at 7 unit is $600 , and after that MC > MR , so , firm should produce till 7 unit.

(2) Profit that Firm line's make is equal to

PROFIT = TOTAL REVENUE - TOTAL COST

(At , 7 unit) Total revenue = Price x Quantity

TR = 650 x 7 = $4550

TC = $ 3300

Profit = $4550 - $3300

= $ 1250

(3)


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