Assignment:
You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1 million per month that you can"t get out of. You also have a marginal printing cost of $.25 per paper as well as marginal delivery cost of $.10 per paper. If sales fall by 20% from 1 million papers per month to 800,000 papers per month, what happens to the AFC per paper, the MC per paper, and the minimum amount that you must charge to break even on these costs?
1. Assume the following cost data are for a purely competitive producer:
|
Total
Product
|
Average
fixed
cost
|
Average
variable
cost
|
Average
total
cost
|
Marginal
cost
|
|
0
|
|
|
|
$45
|
|
1
|
$60.00
|
$45.00
|
$105.00
|
40
|
|
2
|
30.00
|
42.50
|
72.50
|
35
|
|
3
|
20.00
|
40.00
|
60.00
|
30
|
|
4
|
15.00
|
37.50
|
52.50
|
35
|
|
5
|
12.00
|
37.00
|
49.00
|
40
|
|
6
|
10.00
|
37.50
|
47.50
|
45
|
|
7
|
8.57
|
38.57
|
47.14
|
55
|
|
8
|
7.50
|
40.63
|
48.13
|
65
|
|
9
|
6.67
|
43.33
|
50.00
|
75
|
|
10
|
6.00
|
46.50
|
52.50
|
|
a. At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize per unit of output?
b. Answer the questions of 4a assuming product price is $41.
c. Answer the questions of 4a assuming product price is $32.
d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3).
|
(1)
Price
|
(2)
Quantity
supplied,
single firm
|
(3)
Profit (+)
or loss (l)
|
(4)
Quantity
supplied,
1500 firms
|
|
$26
|
|
$
|
|
|
32
|
|
|
|
|
38
|
|
|
|
|
41
|
|
|
|
|
46
|
|
|
|
|
56
|
|
|
|
|
66
|
|
|
|
e. Now assume there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the same cost data shown in the table. Complete the industry supply schedule (column 4).
f. Suppose the market demand data for the product are as follows:
|
Price
|
Total
quantity
demanded
|
|
$26
|
17,000
|
|
38
|
15,000
|
|
38
|
13,500
|
|
41
|
12,000
|
|
46
|
10,500
|
|
56
|
9,500
|
|
66
|
8,000
|
What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?
2. A firm in a purely competitive industry is currently producing 100 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $275. What are the firm's ATC per unit at these three levels of production? If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? From what you know about these firms' cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm's accounting profit per unit be?