Question 2: Question 3: Leslie is a producer of waffles in a perfectly competiti

Question

Question 2:

Question 3:

Leslie is a producer of waffles in a perfectly competitive market. She is currently deciding how to maximise her individual profit. Which of the following statements are true: Leslie should produce whatever quantity she wants. Leslie should produce until her marginal cost is equal to the market price for waffles. Leslie should produce until her marginal cost is equal to her marginal revenue. Leslie should produce where her marginal cost is higher than the market price for waffles

Explanation / Answer

I. In a perfect competitive market the firm maximizes its profit by producing at a point where its marginal cost is equal to marginal revenue or the market price. Since the firm can sell an additional output only at the price prevailing in the market, the marginal revenue is equal to the market price.   Since all output can be sold at a single price his average revenue is equal to marginal revenue which is equal to the price. The equilibrium condition is MR=AR=Price.

Options.

1. Leslie should produce until her marginal cost is equal to the market price of waffles.

2. Leslie should produce until her marginal cost is equal to her marginal revenue.

II. The equilibrium of a firm in a perfect competitive market gives maximum profit when it produces at the lowest point of average cost. Average cost is the summation of average fixed cost and average variable cost. AC=AVC+ AFC. At the profit maximizing output the average variable cost is $ 2.80 per sandwich. Therefore his total average variable cost is $2.80 × 55= $154.

Total variable cost is variable cost per unit × number of output produced.

1. The total variable cost Ted will incur at his profit maximizing production level is $ 154.

Average fixed cost is the total fixed cost divide by the number of output produced.

Here average variable cost is given which is equal to $ 2.80 per sandwich. Hence the average total cost – average variable cost is equal to average fixed cost, i.e $ 3.10 - $2.80 = 0.30.

2. Ted’s average fixed cost at his profit maximizing production level is 0.30.

The shutdown point is the point where the market price falls below the minimum average variable cost. Since his minimum average variable cost is $.2.70 per sandwich $2.70 is the shutdown point.

III. If the market price begins to drop below $4.00 per sandwich and Ted’s cost remain unchanged, Ted will need to shut down if the market price fall below $2.70 per sandwich.

3. The profit maximizing output of cronuts is 20 and the total cost is 177 (Total fixed cost + total variable cost=125+52=177). Then price will be total cost divided by the profit maximizing output which is 177    = 8.85 it can be estimated as 9.     20

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