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4.4)

Total cost (TC) = Fixed cost + variable cost (VC)

Average variable cost (AVC) = VC / Output (Q)

Average total cost (ATC) = TC / Output (Q)

(1) Option (C)

In situation 1, TC = $(5,000 + 5,000) = $10,000

ATC = $10,000/ 1,000 = $10

Since Price = ATC, firm will break-even.

(2)

In situation 2, TC = $(6,000 + 5,000) = $11,000

AVC = $5,000 / 1,000 = $5

ATC = $11,000/ 1,000 = $11

Since Price > AVC, firm will continue to operate in short run, but Since Price < ATC, there is a

loss.

(3) Option (C)

In situation 3, TC = $(5,000 + 11,000) = $16,000

AVC = $11,000 / 1,000 = $11

ATC = $16,000/ 1,000 = $16

Since Price < AVC, firm will shut down in short run, and Since Price < ATC, there is a loss.

3.4)

If the price falls to $2.5, Andy will produce 0 basketball , at a price of 0 and the loss will be $10

5.4)

Economic profit = Accounting Profit – Opportunity cost

i.e. = 80000-75000-3000

=2000

2.6)

If the price falls to $5.5 per bushel, farmer will produce as long as price is greater than marginal

cost i.e 6 bushels

Profit:

Revenue: 6x5.5 = $33

Cost: $ 29

Profit: $4

2.7)

No , the change in marginal cost will not change the profit maximizing level for the farmer.

Profit is maximum when MR=MC=P. For 7 units MC was $6.5, but P was $7. So a $0.5 increase

will make the MC = $7.

Hence the profit maximizing output will remain at 7 units

Profit

Revenue: 49

Cost: 35.5+0.5=36

Profit: $ 13

2.8)

Fixed cost : $10

No, even if the fixed cost is increased by $10, The marginal cost not will change, thereby no

change in the profit maximizing output

Profit

Revenue: 49

Cost: 35.5+10=45.5

Profit: $ 3.5

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