In: Economics
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) 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.
(Question 1 continues on the next page)
Price |
Quantity of Chairs Produced |
Economic Profit/Normal Profit/Loss/Shut Down |
$250 |
||
$350 |
||
$450 |
||
$550 |
||
$650 |
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 |
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 :
(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)