Question

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.

Answer 1

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.