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 marginal cost per unit, the average variable cost, and the average total 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 $1.50 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 $1.00 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 $0.75 per gallon. In the short run, will Joe earn a profit?
i. In the short run, should he produce or shut down?