Icecubes Inc. is a perfectly competitive business with regular seasonal demand c

Question

Icecubes Inc. is a perfectly competitive business with regular seasonal demand changes:

In the fall and winter, Icecubes Inc. can sell its product at a price of $0.40.

In the spring and summer, Icecubes Inc. can sell its product at a price of $1.80

The fixed cost are $3 and the ATC, AVC, MC are given by the following table:

Answer whether each of the following are True/False and clearly explain your conclusion.

A.To maximize profits Icecubes Inc. produce 10 units in fall and winter and 60 units in spring and summer.

B.Icecubes Inc. is making profits in fall and winter and also in spring and summer.

C.Icecubes Inc. is making loss in fall and winter but profits in spring and summer.

D.The total profits in each year are positive so the company wants to stay in the market.

Explanation / Answer

Perfectly competitive firm uses P = MC rule for quantity setting. In the fall and winter, Icecubes Inc. can sell its product at a price of $0.40. MC is 0.40 when Q = 10. But AVC is 0.80 which implies P < AVC. Hence in fall and winters it sells 0 units as it does not produce. In the spring and summer, it can sell its product at a price of $1.80. MC is 0.40 when Q = 60. Hence in spring and summer it sells 60 units. Thus A is false.

In fall and winter, it does not produce anything but faces a loss of $3 which is the fixed cost. In spring and summer, it does make a profit as P is 1.80 and ATC is 1.30. So P > ATC. Thus, B is false

Since Icecubes Inc. is making loss of $3 in fall and winter but profits of (1.80 - 1.30)*60 = $30 in spring and summer. C is true.

Total profit per year is -3 in fall and winter and $30 in spring and summer,total yearly profits are $27. Hence the firm will stay in the market. D is true.

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