Question

In: Economics

Assume that Harry Ellis produces table lamps in the perfectly competitive table lamp market. OUTPUT PER...

Assume that Harry Ellis produces table lamps in the perfectly competitive table lamp market.

OUTPUT PER WEEK

TOTAL COSTS

AFC

AVC

ATC

MC

0

$100

1

150

2

175

3

190

4

210

5

240

6

280

7

330

8

390

9

460

10

540

4.4.a  Fill in the missing values in the above table.

4.4.b  Suppose the equilibrium price in the table lamp market is $50. How many table lamps should Harry produce, and how much profit will he make?

4.4.c   If next week the equilibrium price of table lamps drops to $30, should Harry shut down? Explain.

Solutions

Expert Solution


4.4 (a)

Following is the complete table -

Output per week Total Cost TFC TVC AFC AVC ATC MC
0 100 100 0 - - - -
1 150 100 50 100 50 150 50
2 175 100 75 50 37.5 87.5 25
3 190 100 90 33.33 30 63.33 15
4 210 100 110 25 27.5 52.5 20
5 240 100 140 20 28 48 30
6 280 100 180 16.67 30 46.67 40
7 330 100 230 14.28 32.86 47.14 50
8 390 100 290 12.5 36.25 48.75 60
9 460 100 360 11.11 40 51.11 70
10 540 100 440 10 44 54 80

4.4 (b)

The firm is a perfectly competitive firm.

A perfectly competitive firm maximizes profit when it produce that level of output corresponding to which price equals marginal cost.

The price is $50 per table lamp.

The price equals marginal cost corresponding to production of 7 table lamps.

So,

Harry should produce 7 table lamps.

Calculate the profit -

Profit = Total revenue - Total cost

Profit = [Price * Quantity] - Total cost

Profit = [$50 * 7] - $330

Profit = $350 - $330

Profit = $20

He will make profit of $20.

4.4 (c)

A perfectly competitive firm shut down when price is less than the average variable cost.

The price of table lamp drops to $30.

This price equals marginal cost corresponding to production of 5 table lamps.

The average variable cost when 5 table lamps are produced is $28.

Price is greater than the average variable cost.

So,

Harry should not shut down.


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