Question

1. The Ace Pizza Company makes and sells frozen pizzas. The company pays $2500 to rent the building it uses and pays $500 to rent the equipment it uses. These are the firm’s fixed costs. The company’s variable costs are listed in the following table.

Quantity of Pizzas	Variable Costs
0	$0
200	$400
400	$1,000
600	$1,800
800	$3,600
1000	$7,000

a) Calculate the firm’s total cost, average cost, and marginal cost for each quantity of output. Fill in the following table.

2. b) Assume that this is a perfectly competitive industry. If the price of a frozen pizza is $9 how many pizzas should the Ace Pizza Company produce if it wants to maximize its profit? Explain

3. c) When the price is $9 per pizza, how much revenue will Ace receive, when it produces the profit maximizing quantity of pizzas? Show your calculation.

4. d) What will the firm’s profit be, when it produces the profit maximizing quantity of pizzas? Show your calculation and explain this result.

5. e) Will this company be profitable if the price of frozen pizzas is $3? Explain

6. f) What is the minimum average total cost for the Ace Pizza Company? What is the significance of the minimum average total cost?

Quantity of Pizzas	Fixed Costs	Variable Costs	Total Cost	Average Cost	Marginal Cost
0		$0
200		$400
400		$1,000
600		$1,800
800		$3,600
1000		$7,000

Answer 1

Q	FC	VC	TC	AC	MC
0	3000	0	3000
200	3000	400	3400	17	2
400	3000	1000	4000	10	3
600	3000	1800	4800	8	4
800	3000	3600	6600	8.25	9
1000	3000	7000	10000	10	17

B) When P=9, then setting P=MC, the firm should produce Q = 800 units

C) Revenue = Price*Quantity

= 9*800

= 7200

D) Profit = TR-TC

= 7200-6600

= 600

E) When P=3, the company would incur loss as It will produce Q=400 units at which TR = 400*3 = 1200 whereas total cost = 4000

F) The minimum ATC = 8

The significance of minimum ATC is that the firm would only want to produce in the long run when the price = minimum ATC so that total revenue = total cost