The table shows the market demand schedule for toys and the graph shows the shor
ID: 1121913 • Letter: T
Question
The table shows the market demand schedule for toys and the graph shows the short-run cost curves of a toy producer. The market has 1,000 identical toy producers Price and cost (dollars per toy) 27 24 MC At a market price of $12 a toy, the firm produces toys a week O A. 1000 OB, either 1000 or zero 21- C. 1,500 O D. zero O E. 500 At a market price of $12 a toy, the firm's economic ATC 18- AVC 15 rofit in the short run is equal to 12- In the long run, firms the market 91 0 500 1000 1500 2000 2500 Quantity (toys per week)Explanation / Answer
The zero profit point is the point at which the toy producers will produce. In other words, the price at which the firm can cover average total costs. However, if the firm produces below the point where the price can cover the average variable costs then the firm will shutdown.
The firm will produce where marginal cost is equal to price and price is equal to average variable cost.
At a market price of $12, the firm will produce 1000 toys a week.
At a market price of $12, total revenue = price*quantity = 12*1000 = 12000
Total cost is equal to quantity*average total cost = 1000*17 = 17000
Profit = 12000 - 17000 = -5000
At a market price of $12 a toy, the firms economic profit in the short run is equal to -$5000.
In the long run firms EXIT the market.
The firms will exit the market because the price is at a point that is below the average total cost. In other words, the price is below the zero profit price, so firms will leave the market until price come back equal to average cost.
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