Jack Brown owns a small factory where he makes T-shirts for sale

QUESTION

ECON 661, Managerial Economics
Homework Assignment 4

Answer
all questions and show all your work or justify your answers
1. Jack Brown owns a small factory where he makes
T-shirts for sale. He rents a building for $30,000 per month and rents a
machine for $20,000 a month. Those are his fixed costs. His total variable cost
is given in the table below. The T-shirt industry is a perfectly competitive
and anyone who enters will face the same costs of production as Jack’s.

Quantity
of T-shirts

TVC

AVC

ATC

MC

0

$0

1,000

5,000

2,000

8,000

3,000

9,000

4,000

14,000

5,000

20,000

6,000

33,000

7,000

49,000

8,000

72,000

9,000

99,000

10,000

150,000

(4 pts each)
a. Construct Jack’s AVC, ATC and MC schedules by
filling the blanks in the table.

b. After
completing the table, use the information (data) therein to answer the following
questions. (Note: Solutions given based on any information other than what is
contained in the table will not be accepted even if correct).
(i) If the current market price for a
T-shirt is $23 per unit, how many units of T-shirts should Jack produce in
order to maximize profit in the short run?

(ii) Given your answer for part (i), what
will his total profit (loss) be?

(iii) Will he stay in the industry or
exit in the long run?

(iv) Suppose instead that the market
price of T-shirt is $6 per unit, what is the profit maximizing quantity of
T-shirts that Jack should produce?

(v) Given your answer for part (iv), what
will his total profit be?

(vi) Will he stay in the industry or exit
in the long run?

(vii)
What is Jack’s break-even price? What is his shut down price (over what range of
prices)?

2.
A monopoly firm estimates the demand function (curve) for its output to be:

Q
= 1624 – 0.25P,

and its total variable cost function
as

TVC
= 24Q – 4Q2 + 1/3Q3

Where Q is output

(8 pts each)
a. How many units should the firm produce
to maximize profit?

b. What is the profit maximizing price of
the output?

c. Should the firm actually produce in
the short run or shut down?

In addition to its demand and TVC
functions, the firm knows that its fixed cost is $22,000 per year.

d. How much profit (loss) does the firm
make?

ANSWER:

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