4. Joe Brown’s dairy operates in a perfectly competitive marketplace. Joe’s mach

Question

4. Joe Brown’s dairy operates in a perfectly competitive marketplace. Joe’s machinery costs $500 per day and is the only fixed input. His variable costs are comprised of the wages paid to the few workers he employs at the dairy and the grain he feeds to his dairy cows. His cost structure is shown on the accompanying table Gallons of Milk FC VC TC MC AVC ATC 0 $500 - $500 - - - 1000 500 $2,100 2,600 $2.10 $2.10 $2.60 2000 500 $2,200 2,700 $0.10 $1.10 $1.35 3000 500 $2,900 3,400 $0.70 $0.97 $1.13 4000 500 $3,680 4,180 $0.78 $0.92 $1.05 5000 500 $5,180 5,680 $1.50 $1.04 $1.14 4.a. What is the break-even price? b. What is the shut-down price? c. If the market price of milk is $1.50 per gallon, will Joe make a profit? Explain. d. If the market price of milk is $1.50 per gallon, should Joe continue to produce in the short run? Explain. e. If the market price of milk is $1.00 per gallon, will Joe make a profit? Explain. f. If the market price of milk is $1.00 per gallon, should Joe continue to produce in the short run? Explain. g. If the market price of milk is $0.75 per gallon, will Joe make a profit? Explain. h. If the market price of milk is $0.75 per gallon, should Joe continue to produce in the short run? Explain.

Explanation / Answer

4. a. Break-even price is the price at which the average cost is the least. 4000 gallons, at a cost of $1.05 per gallon therefore $1.05 is the break -even price per gallon

4. b. What is the shut-down price?

Shut-down price is the lowest value of the average variable cost. The lowest value of the average variable cost is $0.920 per gallon.

4. c. If the market price of milk is $1.50 per gallon, will Joe make a profit? Explain.

Yes. Joe will earn a profit in the short-run if the selling price is $1.50 per gallon. This is because the selling price of $1.50 is greater than the break -even price of $1.045 per unit.

4. d. If the market price of milk is $1.50 per gallon, should Joe continue to produce in the short run? Explain.

He should produce in the short-run as he is earning a profit. Also, the price of $1.50 per gallon is greater than the shut-down price of $0.920 per gallon.

4. e. If the market price of milk is $1.00 per gallon, will Joe make a profit? Explain.
No. Joe will not earn a profit in the short-run if the milk is priced at $1.00 per gallon. This is because the selling price is lower than the break-even price of $1.045 per gallon.

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