Q VC TC AVC ATC VC Q MC 0 0 2000 -------------- -------------- -------------- --
ID: 1109561 • Letter: Q
Question
Q
VC
TC
AVC
ATC
VC
Q
MC
0
0
2000
--------------
--------------
--------------
--------------
--------------
248
800
2800
3.23
11.29
800
248
800
784
1,600
3600
2.04
4.59
800
536
800
1,416
2,400
4400
1.69
3.12
800
632
800
1,952
3,200
5200
1.7
2.66
800
536
800
2,200
4,000
6000
1.82
2.73
800
248
800
Use the above chart information to answer the below:
1) Capital has a major client willing to contract to pay $3 per item.
a) Should it accept a contract at this price in the long run (beyond the end of the current kitchen lease)? If so, what output levels could be profitable in the long run?
b) Should it accept a contract at this price in the short run? If so, what output levels could be profitable in the short run?
c) What is the most profitable output level?
d) How did you identify the most profitable output level?
Q
VC
TC
AVC
ATC
VC
Q
MC
0
0
2000
--------------
--------------
--------------
--------------
--------------
248
800
2800
3.23
11.29
800
248
800
784
1,600
3600
2.04
4.59
800
536
800
1,416
2,400
4400
1.69
3.12
800
632
800
1,952
3,200
5200
1.7
2.66
800
536
800
2,200
4,000
6000
1.82
2.73
800
248
800
Explanation / Answer
a) The long run has a minimum value of ATC at 2.66. MC at this stage of Q = 1952 is (5200-4400)/(1952-1416) = 1.49. Hence, in the long run, it should accept a contract at this price and the output levels that are profitable in the long run is Q = 1952
b) In the short run also, MC is greater than 3 when Q is 2200 and is less than 3 (at 1.49) when Q = 1952. Hence it should accept the contract in short run at this price and the output levels that are profitable in the long run is Q = 1952
c) Profit is maximum when Price is close (and above or equal) to marginal cost. Here we find that profit is maximum when Q = 1952
Q
TC
Q
MC
Profit
0
2000
--------------
--------------
-2000
248
2800
248
3.23
-2056
784
3600
536
1.49
-1248
1,416
4400
632
1.27
-152
1,952
5200
536
1.49
656
2,200
6000
248
3.23
600
d) It is identified as the level that ensures that Price is close (and above or equal) to marginal cost.
Q
TC
Q
MC
Profit
0
2000
--------------
--------------
-2000
248
2800
248
3.23
-2056
784
3600
536
1.49
-1248
1,416
4400
632
1.27
-152
1,952
5200
536
1.49
656
2,200
6000
248
3.23
600
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