Wendy's Window Cleaning is a small local operation. Wendy presently cleans the outside windows in her neighbours' houses for $36 per house. She does ten houses per day. She is incurring total costs of $420, and of this amount $100 is fixed. The cost per house is constant.
- What is the marginal cost associated with cleaning the windows of one house – we know it is constant?
- At a price of $36, what is her break-even level of output (number of houses)?
- If the fixed cost is 'sunk' and she cannot increase her output in the short run, should she shut down?
A manufacturer of vacuum cleaners incurs a constant variable cost of production equal to $80. She can sell the appliances to a wholesaler for $130. Her annual fixed costs are $200,000. How many vacuums must she sell in order to cover her total costs?
For the vacuum cleaner producer in Exercise 9.2:
- Draw the MC curve.
- Next, draw her AFC and her AVC curves.
- Finally, draw her ATC curve.
- In order for this cost structure to be compatible with a perfectly competitive industry, what must happen to her MC curve at some output level?
Consider the supply curves of two firms in a competitive industry: P=qA and P=2qB.
- On a diagram, draw these two supply curves, marking their intercepts and slopes numerically (remember that they are really MC curves).
- Now draw a supply curve that represents the combined supply of these two firms.
Amanda's Apple Orchard Productions Limited produces 10,000 kilograms of apples per month. Her total production costs at this output level are $8,000. Two of her many competitors have larger-scale operations and produce 12,000 and 15,000 kilos at total costs of $9,500 and $11,000 respectively. If this industry is competitive, on what segment of the LAC curve are these producers producing?
Consider the data in the table below. TC is total cost, TR is total revenue, and Q is output.
| Q |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
| TC |
10 |
18 |
24 |
31 |
39 |
48 |
58 |
69 |
82 |
100 |
120 |
| TR |
0 |
11 |
22 |
33 |
44 |
55 |
66 |
77 |
88 |
99 |
110 |
- Add some extra rows to the table and for each level of output calculate the MR, the MC and total profit.
- Next, compute AFC, AVC, and ATC for each output level, and draw these three cost curves on a diagram.
- What is the profit-maximizing output?
- How can you tell that this firm is in a competitive industry?
Optional: The market demand and supply curves in a perfectly competitive industry are given by: Qd=30,000–600P and Qs=200P–2000.
- Draw these functions on a diagram, and calculate the equilibrium price of output in this industry.
- Now assume that an additional firm is considering entering. This firm has a short-run MC curve defined by MC=10+0.5q, where q is the firm's output. If this firm enters the industry and it knows the equilibrium price in the industry, what output should it produce?
Optional: Consider two firms in a perfectly competitive industry. They have the same MC curves and differ only in having higher and lower fixed costs. Suppose the ATC curves are of the form: 400/q+10+(1/4)q and 225/q+10+(1/4)q. The MC for each is a straight line: MC=10+(1/2)q.
- In the first column of a spreadsheet enter quantity values of 1, 5, 10, 15, 20,..., 50. In the following columns compute the ATC curves for each quantity value.
- Compute the MC at each output in the next column, and plot all three curves.
- Compute the break-even price for each firm.
- Explain why both of these firms cannot continue to produce in the long run in a perfectly competitive market.
