Question

Table 2

Number of Cinnamon Rolls	Variable Costs	TC	ATC	AVC	MC
0	0
1	2
2	3.5
3	5.5
4	8
5	11
6	15
7	21
8	29
9	39

1. Tracy’s fixed costs are still $7
2. Show Tracy’s short-run supply curve on the graph.
3. If demand for cinnamon rolls decreases:
   1. What will happen to the market price of cinnamon rolls from a change in demand?
   2. What will happen to the profits and output of firms that produce cinnamon rolls in the short run?
   3. What will happen to the supply of cinnamon rolls, the profits of firms, and the number of firms in the long run?

Answer 1

The supply curve above the minimum AVC curve is the supply curve

Number of Cinnamon Rolls	Variable Costs	TC	ATC	AVC	MC
0	0.00	7
1	2.00	9	9.00	2.00	2.00
2	3.50	11	5.25	1.75	1.50
3	5.50	13	4.17	1.83	2.00
4	8.00	15	3.75	2.00	2.50
5	11.00	18	3.60	2.20	3.00
6	15.00	22	3.67	2.50	4.00
7	21.00	28	4.00	3.00	6.00
8	29.00	36	4.50	3.63	8.00
9	39.00	46	5.11	4.33	10.00

a. When the demand for a good decrease, the demand curve shifts to left which reduces the price of cinnamon rolls

b. The profits and output both reduce in the short run, because of reduced demand, price and revenue

c. Supply decreases, profits decreases and the number of firms reduces as only efficient and competitive firms would sustain in the longrun