Question

Albert Bros Doughnuts produces doughnuts and it’s a price taker in the market. It has to pay $1 of rent every day it operates as a business. The following table shows its costs per day for the production of doughnuts (Q is the number of doughnuts)

Quantity	FC	VC
0	1	0
1	1	2
2	1	3
3	1	4.8
4	1	7
5	1	10

(a) At what quantity does Albert Bros Doughnuts’ have its lowest ATC? At what quantity does Albert Bros Doughnuts’ have its lowest AVC?

(b) Suppose that the market price for doughnuts is $2.10 per doughnut. In the short run, will Albert Bros Doughnuts earn a positive, negative, or zero economic profit? In the short run, should the firm produce or shut down? In the long run, holding everything else constant, do you expect this firm to continue to produce or to exit the industry? Explain your answer.

(c) Suppose that the market price for doughnuts is $1.70 per doughnut. In the short run, will Albert Bros Doughnuts earn a positive, negative, or zero economic profit? In the short run, should the firm produce or shut down? In the long run, holding everything else constant, do you expect this firm to continue to produce or to exit the industry? Explain your answer.

(d) Suppose that the market price for doughnuts is $1.30 per doughnut. In the short run, will Albert Bros Doughnuts earn a positive, negative, or zero economic profit? In the short run, should the firm produce or shut down? In the long run, holding everything else constant, do you expect this firm to continue to produce or to exit the industry? Explain your answer.

Answer 1

a.

Quantity	FC	VC	TC	ATC	AVC
0	1	0	1
1	1	2	3	3.00	2.00
2	1	3	4	2.00	1.50
3	1	4.8	5.8	1.93	1.60
4	1	7	8	2.00	1.75
5	1	10	11	2.20	2.00

ATC is minimum at Q = 3, and AVC is 1.6

b)

Quantity	FC	VC	TC	ATC	AVC	P	TR	Profit
0	1	0	1			2.1	0	-1
1	1	2	3	3.00	2.00	2.1	2.1	-0.9
2	1	3	4	2.00	1.50	2.1	4.2	0.2
3	1	4.8	5.8	1.93	1.60	2.1	6.3	0.5
4	1	7	8	2.00	1.75	2.1	8.4	0.4
5	1	10	11	2.20	2.00	2.1	10.5	-0.5

At price $2.1, Albert earns an economic profit of 0.5. Albert can continue to produce both in short and longrun as it is making profit

c)

Quantity	FC	VC	TC	ATC	AVC	P	TR	Profit
0	1	0	1			1.7	0	-1
1	1	2	3	3.00	2.00	1.7	1.7	-1.3
2	1	3	4	2.00	1.50	1.7	3.4	-0.6
3	1	4.8	5.8	1.93	1.60	1.7	5.1	-0.7
4	1	7	8	2.00	1.75	1.7	6.8	-1.2
5	1	10	11	2.20	2.00	1.7	8.5	-2.5

At price $1.7, Albert is making negative economic profit of -0.7. Albert can continue to produce only in short run as it is covering average variable cost but in long run it cannot as it would lead to losses.

d)

Quantity	FC	VC	TC	ATC	AVC	P	TR	Profit
0	1	0	1			1.3	0	-1
1	1	2	3	3.00	2.00	1.3	1.3	-1.7
2	1	3	4	2.00	1.50	1.3	2.6	-1.4
3	1	4.8	5.8	1.93	1.60	1.3	3.9	-1.9
4	1	7	8	2.00	1.75	1.3	5.2	-2.8
5	1	10	11	2.20	2.00	1.3	6.5	-4.5

At price $1.3, Albert is making negative economic profit of -1.9. Albert cannot continue to produce both in short run and long run as it is not covering even average variable cost which is needed to run the business and needs to exit.