Question

Trout farming is a perfectly competitive industry and all trout farms have the same cost curves. when the market price is $25 a fish, farms maximize profit by producing 200 fish a week. at this output, average total cost is $20 a fish and average variable cost is $15 a fish. minimum average variable cost is $12 a fish.

i) If the price falls to $20 a fish, will a trout farm produce 200 fish a week. Explain why or why not

ii) If the price falls to $12 a fish, what will the trout farmer do?

iii) What are two points on a trout farm's supply curve?

Answer 1

(i) When output is 200 but price is $20, this price is equal to ATC, so the farm breaks even. But since this price is higher than AVC of $15, the farm can cover its revenue using its total variable cost, therefore the farm will continue producing 200 units.

(ii) When output is 200 but price is $12, this price is equal to ATC, so the farm makes economic loss. Also, this price is lower than AVC of $15, so the farm cannot cover its revenue using its total variable cost, therefore the farm will shut down.

(iii) The farm's supply curve is the portion of its Marginal cost (MC) curve above the minimum point of AVC. Since price equals MC, the two relevant points on supply curve will be: (Price = $12 & Quantity = 0) and (Price = $25 & Quantity = 200).