Wondering if my answers to these are correct before I click submit? Thanks! The

Question

Wondering if my answers to these are correct before I click submit? Thanks!

The short-run supply curve Consider the competitive market for ceiling halogen lamps. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry. For each price in the following table, use the graph to determine the number of lamps this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero units and the profit-maximizing quantity. Also, indicate for each price whether the firm will produce, shut down, or be indifferent between the two in the short run, and whether it will make a profit, suffer a loss, or break even.

Explanation / Answer

At any price P, the firm will maximize profits by producing the quantity at the level where P=MC. If P=MC<AVC then the firm will not be able to cover its variable costs by operating and hence each unit produce adds to the loss incurred. Thus the firm will decide to shut down.

If P=MC>min. AVC but less than ATC then the firm will be able to cover its variable costs of production as well as part of its fixed costs. Therefore it will decide to operate in the short run to minimize losses and shut down and exit in the longer run.

IfP=MC>ATC, then the firm is earning profits and will operate in the short and long run as well.

At P=10, the firm will not produce any output since P=MC=10< AVC. Thus the firm will shut down, i.e. Q=0. Profit=0 (i.e. it is neither earning any positive profit nor incurring any loss- I think breakeven would be the right answer in case there is no option of zero profits)

At P=15, the firm is indifferent between producing and shutting down since P=MC=AVC. The firm is incurring a loss if it produces since P<ATC and will produce Q*=8000 where P=MC=15.

At P=25, Q*=12000. Here P=MC=ATC. Therefore the firm operate in the short run and will breakeven.

For P=35, Q*=16000 and P=MC>ATC. Hence the firm is producing in the short run and earning profits.

For P=50, Q*=20000 and P=MC>ATC. Hence the firm is producing in the short run and earning profits.

For P=70, Q*=24000 and P=MC>ATC. Hence the firm is producing in the short run and earning profits.

For P=90, Q*=28000 and P=MC>ATC. Hence the firm is producing in the short run and earning profits.

In short, only your anwer for P=10 is incorrect (atleast partially)

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