2) You have been hired as the new CEO of Sara World Inc. a small pencil manufac-

Question

2) You have been hired as the new CEO of Sara World Inc. a small pencil manufac- uring firm. The pencil manufacturing industry is highly competitive. The market price for pencil's are p = $5 per pencil. Sara World production is given by q = 2(L)2. The company faces total costs equaled half of a dollar per unit of output squared, TC = .5(q)2 a) On excel construct a table with columns L, Q, MR, AR, MC and ATC for valucs of labor from 0 to 20. b) Find the profit maximizing level of output and corresponding profit level. c) On excel construct a figure showing the information contained in parts (a). Be sure to label all axis and curves (MR, AR, MC, and ATC). Draw the figure for "q" values from 1 to 20 (in one unit intervals). d) Given your answer in part (b) what do you expect will occur in the pencil industry in the long-run? e) Because of family pressures, bad management, and poor choices, Sara World Inc. is forced shut down and liquidate. What do you expect will happen in the pencil industry in terms of market prices as a result of one firm closing down?

Explanation / Answer

a) MR is the marginal revenue and for a perfectly competitive firm, price is always given so MR = Price = $5. AR is demand function which is also equal to price so AR = $5. ATC is TC/q so ATC = 0.5q2/q = 0.5q. MC is given by dTC/dq = 0.5x2q = q

b) The rule is P = MC

5 = q. Thus, profit maximizing quantity is q* = 5. Profit = (P - ATC)*Q = (5 - 0.5*5)*5 = 12.5

d) There will be entry of new firms in the market because there are profits as of now in the short run

e) Nothing will happen if one firm shuts down as there are numerous other firms so that one single firm cannot influence market outcome.

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