PERFECT COMPETITION and THE SUPPLY CURVE & MONOPOLY, Microeconomics

Joe Brown’s dairy operates in a perfectly competitive marketplace. Joe’s machinery costs $500 per day and is the only fixed input. His variable costs are comprised of the wages paid to the few workers he employs at the dairy and the grain he feeds to his dairy cows.

The variable cost associated with each level of output is given in the accompanying table.

Gallons of Milk Variable Cost
0 -
1000 $ 2,100
2000 $ 2,200
3000 $ 2,900
4000 $ 3,680
5000 $ 5,180

a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.

Gallons of Milk FC VC TC MC AVC ATC
0 $500 - - - -
1000 500 $ 2,100 2600 2.10 26.00
2000 500 $ 2,200 2700 2.70 1.35 27.00
3000 500 $ 2,900 3400 1.70 1.13 11.30
4000 500 $ 3,680 4180 1.39 .92 10.45
5000 500 $ 5,180 5680 1.42 1.13 11.36

b. What is the break-even price?

c. What is the shut-down price?

d. Suppose that the price at which Joe can sell milk is $3 per gallon. In the short run, will Joe earn a profit?

e. In the short run, should he produce or shut down?

f. Now suppose that the price at which Joe can milk is $1.50 per gallon. In the short run, will Joe earn a profit?

g. In the short run, should he produce or shut down?

h. Finally, Suppose that the price at which Joe can sell milk is $0.50 per gallon. In the short run, will Joe earn a profit?

i. In the short run, should he produce or shut down?

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