In: Economics
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.
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.