Question

In: Economics

The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Smitten,...

The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Smitten, a perfectly competitive firm that produces children’s mittens in a competitive market.

Smitten's Production Costs

Quantity (pairs of mittens) Marginal Cost (dollars) Average Total Cost (dollars)
10 $1.60 $5.00
15 2.00 4.00
20 2.45 3.61
25 3.55 3.60
30 4.00 3.67
35 5.50 3.93
40 6.00 4.19
45 8.50 4.67

Instructions: In part a, enter your answer as a whole number. In parts b–d, round your answers to two decimal places.

a. If the market price of children’s mittens is $6.00 per pair, how many pairs of children’s mittens should Smitten produce per week to maximize its profits?

________ pairs of mittens

b. What is Smitten’s average total cost at the profit-maximizing quantity of children’s mittens?

   $ ________

c. What are Smitten’s weekly profits if the market price is $6.00 per pair and the firm produces the profit-maximizing quantity of mittens?

   $ ________

d. What are Smitten’s weekly profits if the market price is $5.50 per pair and the firm produces the profit-maximizing quantity of mittens?

     $ ________

e. The price at which Smitten would earn a normal profit is where:

  • marginal cost equals average cost.

  • marginal cost equals marginal revenue at the minimum of marginal cost.

  • marginal cost equals average cost at the minimum of average cost.

  • average cost equals average revenue at the minimum of average cost.

Solutions

Expert Solution

A.

40 pairs

Explanation :

Firm maximises it's profit where MR equals MC. And in perfect competition price is equals to MR. So at 40 quantity MR=MC.

B.

4.19

Explanation :

Average total cost at profit maximising quantity is 4.19 in table given.

C.

Profit, =(price - ATC) *quantity

=(6-4.19)*40

=72.40

D.

Quantity :35

Profit:54.95

Explanation :

In perfect competition price is equals to MR. And firm maximizes its profit where MR equals MC. So quantity will be 35.

Profit =(Price-ATC) *quantity

=(5. 50-3.93)*35

=54.95

E.

marginal cost equals marginal revenue at the minimum of marginal cost.

Explanation :

Firm earns normal profit when price is above average total cost.

When marginal cost is equals to average cost firm earns zero economic profit.


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