Short-run Firm Supply. Produce Pride, Inc., supplies sweet corn to canneries loc

Question

Short-run Firm Supply. Produce Pride, Inc., supplies sweet corn to canneries located throughout the Missouri River Valley. Like many grain and commodity markets, the market for sweet corn is perfectly competitive. With $500,000 in fixed costs, the company's total and marginal costs per ton (Q) are:

TC = $500,000 + $400Q + $0.04Q2

MC = ?TC/?Q = $400 + $0.08Q

A. Calculate the industry price necessary to induce short-run firm supply of 5,000, 10,000, and 15,000 tons of sweet corn. Assume that MC > AVC at every point along the firm's marginal cost curve and that total costs include a normal profit.
B. Calculate short-run firm supply at industry prices of $400, $1,000, and $2,000 per ton.

Explanation / Answer

A. Calculate the industry price necessary to induce short-run firm supply of 5,000, 10,000, and 15,000 tons of sweet corn. Assume that MC > AVC at every point along the firm's marginal cost curve and that total costs include a normal profit. Since we find the optimal output by setting MR=MC, but in a perfect competition, MR=P, we find the optimal level of production where MC=P. So, we use the equation: P=400+.08Q Where Q=5,000 P=400+.08(5000) P=800 Similarly, where Q=10,000 P=400+.08(10,000) P=1,200 and where Q=15,000 P=400+.08(15,000) P=1,600 B. Calculate short-run firm supply at industry prices of $400, $1,000, and $2,000 per ton. We use the same formula of: P=400+.08Q and find the Quantity for each given price. 400=400+.08Q Q=0 1,000=400+.08Q Q=7,500 2,000=400+.08Q Q=20,000

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