PROBLEM SET 9 2. The liquorice industry is competitive. Each firm produces 2 million liquorice bootlaces per year. The bootlaces have an average total cost of €0.20 each, and they sell for €0.30. a) What is the marginal cost of a liquorice bootlace? Since P=MC in equilibrium, price would be €0.30 (the value of the marginal cost) b) Is this industry in long-run equilibrium? Why or why not? It’s not in long-run equilibrium because price exceeds ATC. 3. Alejandro's lawn-mowing service is a profit-maximizing, competitive firm. Alejandro mows lawns for €27 each. His total cost each day is €280, of which €30 is a fixed cost. He mows 10 lawns a day. What can you say about Alejandro's short-run decision regarding shutdown and his long-run decision regarding exit? P per lawn: €27. TC (FC+VC)= €280€30FC, €250VC. AFC= 30/10= 3 AVC= 250/10= 25 TR= PQ=10·27= €270 Shut down: TR (270)> VC (250), so he shouldn’t do it. Exit: TR (270) < TC (280) he should exit because TR<TC and P<ATC (27 < 28 (280/10)) 4. Consider total cost and total revenue given in the table below: a) Calculate profit for each quantity. How much should the firm produce tomaximize profit?
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