Question and Answer free essay sample

Consider the following table of costs for the Winsome Widget Factory, which operates in a perfectly competitive market. The market price faced by this firm is $6. 00 per widget. a. Fill in the formula for Average Fixed Cost, Average Variable Cost, Average Total Cost, Marginal Cost, Total Revenue, Marginal Revenue, and Total Profit at the top of the column in the gray section within the table. b. Fill in the missing values for Total Fixed Cost, Total Variable Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost, Marginal Cost, Total Revenue, Marginal Revenue, and Total Profit in the blue sections of the table. Explain. The slope of the total revenue curve is marginal revenue and the slope of the total cost curve is marginal cost. Economic profit (the difference between total revenue and total cost) is maximized where marginal revenue equals marginal cost. This is consistent with the marginal decision rule, which holds that a profit-maximizing firm should increase output until the marginal benefit of an additional unit equals the marginal cost. We will write a custom essay sample on Question and Answer or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The marginal benefit of selling an additional unit is measured as marginal revenue. Finding the output at which marginal revenue equals marginal cost is thus an application of our marginal decision rule. To use the marginal decision rule in profit maximization, the firm produces the output at which marginal cost equals marginal revenue. Economic profit per unit is price minus average total cost; total economic profit equals economic profit per unit multiplied by the quantity. If price falls below average total cost, but remains above average variable cost, the firm will continue to operate in the short run, producing the quantity where MR = MC doing so minimizes its losses. If price falls below average variable cost, the firm will shut down in the short run, reducing output to zero. The lowest point on the average variable cost curve is called the shutdown point. So Winsome Widgets Marginal Revenue is at 60 no matter what output is at, so at output level 50 the MR=MC, and as the marginal decision rule applies at this point. f. Is Winsome Widgets in long-run equilibrium? Explain. First consider the definition of long-run equilibrium: All firms are maximizing profits. No firm has incentive to enter or exit, because all firms are earning zero economic profit. Price is such that QS  = QD. (Output Supply equals Output In other terms that means in an  Increasing Cost (time of an) Industry, an increase in input demand (anticipation of when people get greedy for something) by firms in the industry causes an increase in input prices (firms sale price to break even) and thereby an increase in average production costs. Also, at Long Run equilibrium, profits of all firms in the industry are zero and so no firms are entering or exiting the market. Therefore, Winsome Widgets is not at long run equilibrium because the latest (most current) output is 100. Output levels 40 through 59 would be considered in the state of Long Run equilibrium level. Everything before/after that range isn’t eligible for that. Task 2: Given a numeric production schedule, you will calculate profit and make decisions about short-run profitability to answer questions relating to your calculations. Jerry’s Lock Shop is a perfectly competitive firm, and Jerry is operating at his level of output, which maximizes profit. He can change locks for 20 different customers per day and charges each customer $35 for each lock. His total cost of changing locks is $800 and his fixed cost is $160. Answer the following questions. For each question, show the formula and the calculation as well as the final answer. a. What is Jerry’s marginal cost? Explain how you arrived at that answer. Fixed Cost is $160/20 customers= AFC of 8 If ATC=AFC+AVC, Then AVC=ATC-AFC or 40-8= AVC of 32 TC 800/20 (Q) customers= ATC of 40 shared by the 20 customers he services. Answered because the more customers or output there is sharing of his TC the better off his business is. However if he cannot make positive math alone then he cannot teach and is unadvisable to continue losing money. Firing him and shutting down might be a good idea as well. Arrival is logical, if one man makes -100 for business in one day, then 2 men would be worse, especially being taught skills by someone who cannot make enough alone.