Suppose a producer in the (perfectly competitive) market for golf balls has the following total cost...

Suppose a producer in the (perfectly competitive) market for golf balls has the following total cost
and marginal cost functions, and that market price is $10.
T C = 50 + 0.1q
2
MC = 0.2q

(a) [5 pts] What is the firm’s fixed cost?

(b) [5 pts] Write the equation for the firm’s average total costs.

(d) [15 pts] Graph the market and the firm (making sure to illustrate marginal cost, marginal
revenue, average total cost and average variable cost). Should the firm continue to produce in the short run?

Solutions

Expert Solution

(a) Total Cost = Fixed Cost + Variable Cost

Fixed cost is independent of the output level

Firm's fixed cost = 50

(b)

Average Total Cost, ATC = TC/q = (50 + 0.1q) / q

ATC = (50/q) + 0.1

(c)

Under perfect competition, MR = p = AR is the demand curve of the firm

MR = 10

(d)

TVC = 0.1q

AVC = TVC/q = 0.1

Since, P > AVC, the firm should continue to operate in the short run.

Rahul Sunny answered 1 year ago

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