Question

Suppose Dan's cost of making pizzas is

       C(Q)=6Q+(Q²/160),

and his marginal cost is

MC=6+(Q/80).

Dan is a price taker. If Dan's avoidable fixed cost increases from $10 to $250, how will his supply function change?

a. What is Dan's supply function with fixed costs of $10?

	Q = 80P - 480 if P ≥ 6.5.
	Q = 160P + 480 if P ≥ 6.
	Q = 80P - 80 if P ≥ 6.5.
	Q = 80P + 480 if P ≥ 6.
	Q = 80P - 160 if P ≥ 6.5.

b. What is Dan's supply function with fixed costs of $250?

	Q = 80P - 480 if P ≥ 40.
	Q = 80P - 480 if P ≥ 6.5.
	Q = 80P + 480 if P ≥ 200.
	Q = 80P + 480 if P ≥ 6.
	Q = 80P - 480 if P ≥ 8.5.

Answer 1

C(Q)=6Q+(Q²/160)

Initially fixed cost= 10

Total cost(TC)= 6Q+(Q²/160)+10

MC=dTC/dQ= 6+(Q/80)

a.

For supply function, Put:

P= MC

P= 6+(Q/80)

P= (480+Q)/80

80P= 480+Q

Q= 80P-480 Supply function when Fixed cost=10

Option a is the correct answer

b.

When Fixed cost increases to 250,it does not have any impact on which means MC remain same as:

MC= 6+(Q/80)

For supply function:

P= MC

P= 6+(Q/80)

P= (480+Q)/80

80P= 480+Q

Q= 80P-480 Supply function when Fixed cost=250

Supply function remain same

Option 2nd Q = 80P - 480 if P ≥ 6.5 is correct.