Individual Project 3

Individual Project 3 - 1 Production and Perfect Competition...

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1 Production and Perfect Competition Production and Perfect Competition Marquetta Nixon Microeconomics Professor Grace O. Onodipe Date: Sept. 8, 2011 Due Date: Sept. 11, 2011 1
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2 Production and Perfect Competition In the first case (TFC = $1M): TVC = $4.4M ($4M for wages (50,000 workers x $80 per worker) plus $400,000 other variable inputs AVC = $22 (TVC of $4.4M divided by 200,000 units) ATC = $27 (TVC $4.4M + TFC $1M divided by 200,000 units) Worker productivity = 4 (200,000 units divided by 50,000 workers) Profit/Loss = $400,000 loss (total revenue of 200,000 units times $25 price = $5M minus total cost of $5.4M (total cost can be calculated either by taking ATC times 200,000 units or by taking TVC plus TFC) In the second case (TFC = $3M): TVC unchanged at $4.4M AVC unchanged at $22 ATC = $37 ($4.4M TVC plus $3M TFC divided by 200,000 units) Worker productivity unchanged at 4 Profit/Loss = $2.4M loss (total revenue remains at $5M; total cost = $7.4M) The shutdown rule isn't that if a firm can cover total variable costs at some level of production in the short run, it should continue to operate. Fixed costs are irrelevant in the short run because they are sunk costs. In both
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