Question

4. Brenda Smith operates her own farm raising chickens and producing eggs. She sells her eggs at the local farmers’ market where there are several other egg producers also selling eggs by the dozen. (Brenda operates in a perfectly competitive market in which she is a “price taker.”) In order to make sure she does not lose money on selling eggs, she does an analysis of her costs for producing eggs as shown on Table 4.a.

Dozens of eggs	Fixed Cost	Total Cost	Variable Costs	Average Variable Costs per dozen	Average Total Costs per dozen
0	$3.35	$3.35	n/a	n/a	n/a
10	$3.35	$10.50	$7.15	$0.72	$1.05
20	$3.35	$16.40	$13.05	$0.65	$0.82
30	$3.35	$23.10	$19.75	$0.66	$0.77
40	$3.35	$30.00	$26.65	$0.67	$0.75
50	$3.35	$36.50	$33.15	$0.66	$0.73
60	$3.35	$48.00	$44.65	$0.74	$0.80
70	$3.35	$64.40	$61.05	$0.87	$0.92
80	$3.35	$80.00	$76.65	$0.96	$1.00
90	$3.35	$135.00	$131.65	$1.46	$1.50

a. What is Brenda’s break-even price for a dozen of eggs? Explain how you found that answer.

b. What is Brenda’s shut-down price for a dozen of eggs? Explain how you found that answer.

c. If the market price of a dozen eggs at the local farmers market is $1.45 per dozen, will Brenda make an economic profit? Explain how you determined your answer.

d. If the market price of a dozen eggs at the local farmers market is $1.45 per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

e. If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.

f. If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

g. If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.

h. If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

Answer 1

a) Break-even price for a dozen of eggs is $0.73

The breakeven point is the point where,

Total Revenue = Total cost.

This is the point where firms earn zero economic profits. For a perfectly competitive firm, profit-maximising condition is P= MC.At the breakeven point, the market price is equal to the average total cost. Thus, the breakeven point for a competitive firm can be stated as P = MC = ATC.

Marginal cost curve intersect the average total cost curve at its minimum, the breakeven point for a competitive firm is equal to the minimum of the average total cost curve.

Minimum average total cost is $0.73. Therefore, the breakeven price is P = $0.73 per dozen.

b.) Brenda's shut-down price is $0.65

The shutdown price is the price below which the firm will exit the market. It is the point where price is equal to minimum of average variable cost.

Minimum average variable cost is $0.65. Therefore, Brenda's shut down price is P = $0.65.

C.) Brenda will make a positive economic profit.

It is because market price is greater than the average total cost per dozen up to the 80th dozen. Price is able to cover the firm's cost.

D.) In the short run, Brenda should continue producing eggs. Since the market price is greater than the average variable cost per dozen. If the market price would have been less than minimum of average variable cost then it is profitable for Brenda to shut- down. Since in that case price would not be to cover its costs.

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