Problem Set 1 Econ 306 Dr S. Verma A small local firm produces 10,000 bags of po

Question

Problem Set 1 Econ 306 Dr S. Verma A small local firm produces 10,000 bags of potato chips per month. Firm's monthly cost of production and profits are as follows: Interest & Principle on machines Rent on packaging machine Cost of bags of potatoes Fuel Cost Cost of Spices Wages Packaging material Rent on factory shed (per year) Advertising Normal Profit Economic Profit Per Month =$2400 =$800 =$3000 =$500 =$300 =$16,000 =$800 =$1200 =$1000 =$4000 =$4000 a. Calculate the market price per bag. b. Calculate AFC, AVC, and AC c. What price will only make normal profits? d. Suppose the market price drops. At what price will this firm shut down production?

Explanation / Answer

              TVC = 2400+800+3000+500+16000+800+1000 =24800

              TFC = Rent on factory shed   = 1200

              TC = TFC +TVC = 26000

              Profit = 10000P – TC

              4000= 10000P -26000

              30000/10000 = P

               P =3.

AVC = TVC/10000, AVC = 2.48

AC = TC/10000 ,     AC =2.6

Price = 2.48

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