Question

In a perfectly competitive industry, Kim produces livestock feed which requires a building and machines that process grain into feed. She rents a warehouse for $30,000 per month and rents the machine for $20,000 a month. Those are her fixed costs. Her variable cost per month is given in the table:

Quantity of feeds bags : Variable cost

0                                        $0

1,000                                  5,000

2,000                                  8,000

3,000                                9,000

4,000                                14,000

5,000                                 20,000

6,000                                 33,000

7,000                               49,000

8,000                                72,000

9,000                                99,000

10,000                            150,000

A. calculate Kim's average variable cost, average total cost, and marginal cost for each output.

B. there is free entry into the industry and anyone who enters will face the same costs Kim does. Suppose the current price for a bag of feed is $25. what will her profit be?

C. what is Kim's break even price?

D. what is Kim's shut down price?

Answer 1

a) Fixed cost is 30000 + 20000 = 50000. Total cost is FC + VC.

AVC = VC/Q and ATC = TC/Q

MC = change in TC/change in Q

Table is shown below for MC ATC and AVC

Quantity	Total cost	Marginal cost	Fixed cost	Variable cost	Average variable cost	Average total cost
0	50000		50000	0
1000	55000	5	50000	5000	5.0	55.0
2000	58000	3	50000	8000	4.0	29.0
3000	59000	1	50000	9000	3.0	19.7
4000	64000	5	50000	14000	3.5	16.0
5000	70000	6	50000	20000	4.0	14.0
6000	83000	13	50000	33000	5.5	13.8
7000	99000	16	50000	49000	7.0	14.1
8000	122000	23	50000	72000	9.0	15.3
9000	149000	27	50000	99000	11.0	16.6
10000	200000	51	50000	150000	15.0	20.0

b) At a price of $25, MC is closest to 23 when Q is 8000. Hence firm should produce 8000 units. Revenue is 8000*25 = 200000. Total cost is TC = 122000. Hence profit is 78000

c) Break even price is minimum ATC = 13.8

d) Shut down price is minimum AVC = 3.00