Question1 Total cost(dollars Output pizzas per hour) 0 er hour 10 21 30 2 54 69
ID: 1117096 • Letter: Q
Question
Question1 Total cost(dollars Output pizzas per hour) 0 er hour 10 21 30 2 54 69 4 Pat's Pizza Kitchen is a price taker in a perfectly competitive market. Its costs are in the table a. Calculate Pat's profit-maximizing output and economic profit if the market price is (i) $14 a pizza. (ii) S12 a pizza. (ii) S10 a pizza. b. What is Pat's shutdown point and what is Pat's economic profit if it shuts down temporarily? c. Derive Pat's supply curve d. At what price will firms with costs identical to Pat's exit the pizza market in the long run? e. At what price will firms with costs identical to Pat's enter the pizza market in the long run?Explanation / Answer
You need to find the marginal cost which is the difference of total cost for each additional unit. Minimum of AVC is 10 which means price below 10 will be considered as a shut down price.
a) Firm will take price as given and compare this with the MC. P should be at least greater than MC if not equal. When P = 14, firm will produce 4 units (P > MC which is 13). Profit = TR - TC = 14*4 - 54 = $2.
When P = 12, firm will produce 3 units (P > MC which is 11). Profit = TR - TC = 12*3 - 41 = - $5
When P = 10, firm will be indifferent in producing or not producing. If it produces, it will produce 2 units (P > MC which is 9). Profit = TR - TC = 10*2 - 30 = - $10
b) Shut down point is minimum of AVC which is $10. Economic profit is zero when it shuts down because it does not produce anything at shut down
c) Supply curve is the rising marginal cost curve beyond minimum of AVC. So supply curve is
d) Price below $10 will force firms to leave the market which is the minimum of AVC
e) From the supply curve if the price is greater than 14, firm will earn profit and so new firms will enter
Q TC MC AVC ATC 0 10 1 21 11 11.00 21.0 2 30 9 10.00 15.0 3 41 11 10.33 13.7 4 54 13 11.00 13.5 5 69 15 11.80 13.8Related Questions
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