Moe\'s Shoe Repair is a firm operating in a perfectly competitive market. The ta

ID: 1109218 • Letter: M

Question

Moe's Shoe Repair is a firm operating in a perfectly competitive market. The table below summarizes the firm's cost and output information. Use it to answer the following questions Labor (workers) Output (ci) 4 Total Cost 13 1fi 18 4 120 What is the marginal product of the 4th worker? Suppose the only variable cost that Moe's Shoe Repair incurs is the wage it pays to its workers. If the wage per worker is $25, what is the value of Moe's fixed cost? Is Moe's in the short run or the long run? Explain. a. b. c. Based on the information provided in the table, at what price would Moe's shut down d. Based on the information provided in the table, if the market price is $8, what level of output would maximize Moe's profit?

Explanation / Answer

We have the following information

Labor (Workers)

Output (q)

Marginal Product (MP)

Wage Rate (w)

Total Wage Bill (Variable Cost)

Fixed Cost

Total Cost ($) (Wage Bill + Fixed Cost)

Average Variable Cost (AVC)

Marginal Cost (MC)

Total Revenue (TR)

Marginal Revenue (MR)

6.3

5.6

5.8

104

100

120

6.3

128

125

145

6.9

144

Part a) The marginal product of the 4th worker is 3.

Part b) Fixed cost of Moe is 20. Moe is operating in short-run, this is because in the long-run all the costs are variable.

Part c) The price at which Moe will shut down is $5.6. This is because this is the lowest average variable cost (AVC).

Part d) The profit-maximizing point is where the marginal revenue is equal to the marginal cost. So, at the price of $8 the MC is equal to MR at the output level of 16.