Question

1. Tracy owns a bakery and bakes cinnamon rolls. She operates in a perfectly competitive market for cinnamon rolls. She pays a fixed cost of $7 each day to rent the ovens used in the production process. Her variable costs are provided in Table 1 below. Fill in Tracy’s total cost column.

Table 1

Number of Cinnamon Rolls	Variable Costs	TC	Profit when price=9$	Profit when price =3.60
0	0
1	2
2	3.5
3	5.5
4	8
5	11
6	15
7	21
8	29
9	39

2. Calculate the profit at 9$ per cinnamon roll and fill in the column in Table 1. How many cinnamon rolls will Tracy bake? Will Tracy continue to bake cinnamon rolls in the short run?

Calculate the profit at 3.60$ per cinnamon roll and fill in the column in Table 1. How many cinnamon rolls will Tracy bake? Will Tracy continue to bake cinnamon rolls in the short run?

Answer 1

Total cost = VAriable cost + Fixed costs

MC = Change in total cost/Change in quanity

Total revenue = Price * quantity

Profit = Total revenue - Total costs

Number of Cinnamon Rolls	Variable Costs	Fixed Costs	TC	MC	Total Revenue when Price @9	Profit when price=9$	Total Revenue when Price @3.6	Profit when price =3.60
0	0	7	7
1	2	7	9	2	9	0	3.6	-5.4
2	3.5	7	10.5	1.5	18	7.5	7.2	-3.3
3	5.5	7	12.5	2	27	14.5	10.8	-1.7
4	8	7	15	2.5	36	21	14.4	-0.6
5	11	7	18	3	45	27	18	0
6	15	7	22	4	54	32	21.6	-0.4
7	21	7	28	6	63	35	25.2	-2.8
8	29	7	36	8	72	36	28.8	-7.2
9	39	7	46	10	81	35	32.4	-13.6

In perfect competition, firm sets its price = marginal cost for profit-maximizing output. Tracy will bake quantity where P=MC  

MC= P is not in the table, so we choose MC=8, as MC is below Price

At MC = 8, price =9, quantity = 8 . so Tracy will bake 8 cinnamon rolls. Tracy will continue to bake at this quantity in the short run as she is earning a profit

Setting P=MC when price = 3.6, we choose MC= 3 as it is below the price

We see quantity at this is 5 and profit is zero

Tracy will continue to bake in the short run as she is recovering its variable costs