1. Joe Brown’s dairy operates in a perfectly competitive marketplace. Joe’s mach
ID: 1232199 • Letter: 1
Question
1. 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.
The variable cost associated with each level of output is given in the accompanying table.
Gallons of Milk Variable Cost
0 -
1000 $ 2,100
2000 $ 2,200
3000 $ 2,900
4000 $ 3,680
5000 $ 5,180
a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.
Gallons of Milk FC VC TC MC AVC ATC
0 $500 - - - -
1000 500 $ 2,100
2000 500 $ 2,200
3000 500 $ 2,900
4000 500 $ 3,680
5000 500 $ 5,180
b. What is the break-even price?
c. What is the shut-down price?
d. Suppose that the price at which Joe can sell milk is $3 per gallon. In the short run, will Joe earn a profit?
e. In the short run, should he produce or shut down?
f. Now suppose that the price at which Joe can milk is $1.50 per gallon. In the short run, will Joe earn a profit?
g. In the short run, should he produce or shut down?
h. Finally, Suppose that the price at which Joe can sell milk is $0.50 per gallon. In the short run, will Joe earn a profit?
i. In the short run, should he produce or shut down?
Explanation / Answer
A. Gallons FC VC TC MC AVC ATC 0 500 0 500 0 0 0 1000 500 2100 2600 2100 2.10 2.60 2000 500 2200 2700 100 1.10 1.35 3000 500 2900 3400 700 0.97 1.13 4000 500 3680 4180 780 0.92 1.05 5000 500 5180 5680 1500 1.04 1.14 B. Break even price is different for different levels of production. It equals the ATC for each level of production. C. Shutdown price will occur for a level of production if Joe Brown cannot recoup even his fixed cost. D. If milk price is $3, Joe will earn profit for all levels of productions. E. Produce F. For $1.5/gallon Joe will make profit if demand exceeds 2000 gallons. G. Depends on volume of demand. H. No I. Shutdown
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.