Ethel Simpson owns Fine Lines,
Ethel Simpson owns Fine Lines, a furniture company in Boone, NC.Among other products, Fine Lines produces rocking chairs. Assumethis is a competitive industry. Fine Lines’ total cost of producingrocking chairs per day is related to the production of rockingchairs per day as follows.
|
Fine Lines |
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|
Quantity of Rocking Chairs |
Total Cost |
TFC |
TVC |
ATC |
AVC |
MC |
|
0 |
$500 |
|||||
|
1 |
1,000 |
|||||
|
2 |
1,300 |
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|
3 |
1,500 |
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|
4 |
1,800 |
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|
5 |
2,200 |
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|
6 |
2,700 |
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|
7 |
3,300 |
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|
8 |
4,400 |
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- Assume the market price is $650 per rocking chair. (Incomputing quantities, assume that Fine Lines produces only acertain number of completed chairs each day; it does not producefractions of a chair on any day.)
(1) How many rocking chairs shouldFine Lines produce?
(2) How much profit will Fine Linesmake?
(3) Draw a graph to illustrate youranswer. Your graph should be clearly labeled and should includeFine Lines’ demand for rocking chairs and the ATC, AVC, MC and MRcurves, the price Fine Lines is charging, and the quantity ofrocking chairs Fine Lines is producing. (I don’t care if you drawto scale, but I do want your graph to show the correctrelationships between the cost curves and the market price andamong the different cost curves.) Either on your graph or verbally,indicate the area that identifies the profit or loss.
- Assume the market price falls to $450. Answer the same 3questions I asked in part A.
- Assume the market price falls to $350. Answer the same 3questions I asked in part A.
- Assume the market price falls to $250. Answer the same 3questions I asked in part A.
(Question 1 continues on the next page)
- The table below shows the Fine Lines’ supply schedule forRocking Chairs. Please fill in the table with your answers from A,B, and C above. Fill in the remainder of the table to complete thesupply schedule.
|
Price |
Quantity of Chairs Produced |
Economic Profit/Normal Profit/Loss/Shut Down |
|
$250 |
||
|
$350 |
||
|
$450 |
||
|
$550 |
||
|
$650 |
- Suppose the demand curve in the market for rocking chairs isgiven by the information in the following table. Fill in the marketsupply for chairs. Remember that there are 1,000 identicalfirms in this industry. What is the equilibrium price? Theequilibrium quantity?
|
Rocking Chair Market |
||
|
Price |
Quantity Demanded of Chairs |
Quantity Supplied of Chairs |
|
$250 |
10,000 |
|
|
$350 |
8,000 |
|
|
$450 |
7,000 |
|
|
$550 |
6,000 |
|
|
$650 |
5,000 |
|
- In the short run, at the equilibrium market price, are firms inthe industry operating with an economic profit or a normal profitor a loss, or should the firm shut down? Please explain youranswer.
- In the long run, will the number of firms in the industrychange? Please explain.
Answer:
Sol (A) :
| Quantity | TC | TFC | TVC | AVC | ATC | MC |
|---|---|---|---|---|---|---|
| 0 | 500 | 500 | – | – | 0 | – |
| 1 | 1000 | 500 | 500 | 500 | 1000 | 500 |
| 2 | 1300 | 500 | 800 | 400 | 650 | 300 |
| 3 | 1500 | 500 | 1000 | 333.33 | 500 | 200 |
| 4 | 1800 | 500 | 1300 | 325 | 450 | 300 |
| 5 | 2200 | 500 | 1700 | 340 | 440 | 400 |
| 6 | 2700 | 500 | 2200 | 366.67 | 450 | 500 |
| 7 | 3300 | 500 | 2800 | 400 | 471.42 | 600 |
| 8 | 4400 | 500 | 3900 | 487.5 | 550 | 900 |
(1) If price is $650 , then firm should produce till 7 units ofchair. Because ofnthe following reason :
- Producer is in equilibrium when , Marginal Revenue and Marginalcost are equal to each other. And Marginal cost is decreases afterequilibrium.
- So , Price = MR = $650 and MC at 7 unit is $600 , and afterthat MC > MR , so , firm should produce till 7 unit.
(2) Profit that Firm line’s make is equal to
PROFIT = TOTAL REVENUE – TOTAL COST
(At , 7 unit) Total revenue = Price x Quantity
TR = 650 x 7 = $4550
TC = $ 3300
Profit = $4550 – $3300
= $ 1250
(3) 
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