Question

The table below shows the daily costs of Cathy's Corn Stand. Cathy sells her corn cobs in a perfectly competitive market.

Cathy's Corn Stand's Production Costs

Quantity (corn cobs)	AVC (dollars)	ATC (dollars)	MC (dollars)
10.00	$2.50	$5.00	$2.50
20.00	2.25	3.50	2.00
30.00	2.00	2.83	1.50
40.00	1.81	2.44	1.25
50.00	1.70	2.20	1.25
60.00	1.67	2.08	1.50
70.00	1.68	2.04	1.75
80.00	1.75	2.06	2.25
90.00	1.86	2.14	2.75

a. Draw Cathy's marginal cost (MC) curve.

Instructions: Use the tool provided 'MC' to plot the curve point by point (8 points total).

Instructions: In part b, enter your answer as a whole number. In part c, round your answer to two decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers.

b. If the market price of corn is $1.75 per corn cob, in the short run how much corn should Cathy produce each day to maximize profits?

      corn cobs per day

c. What are Cathy's profits/losses per day if she produces the profit-maximizing quantity of corn in the short run (losses are expressed as a negative number)?

     $

d. In the short run, assuming nothing else changes, Cathy should:

• produce the same quantity of corn per day.

• produce a lower quantity of corn per day.

• shut down, because the market price is above the AVC.

• produce a greater quantity of corn per day.

e. If the short-run price of corn falls to $1.25 per corn cob, Cathy should:

• produce a lower quantity of corn per day.

• produce the same quantity of corn per day.

• shut down, because the market price is below the AVC.

• produce a greater quantity of corn per day.

Answer 1

a.

MC Marginal Cost($) 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Quantity

b. Profit-maximizing condition:

MC = Price = $1.75 when the quantity = 70 units

Cathy should produce 70 corn cobs per day

c. When the quantity = 70 corn cobs per day

ATC = $2.04

Price = $1,75

Profit/Loss = Total Revenue - Total Cost = Price * Quantity - ATC * Quantity = $1.75 * 70 - $2.04 * 70 = -$20.30 (loss)

d. As the price is greater than the AVC, Cathy is recovering her variable costs and hence should continue to produce the same quantity(70 corn cobs per day) in the short-run

Ans: produce the same quantity of corn per day.

e. If the price falls to $1.25 per corn cob, it is below the minimum AVC. As Cathy cannot recover the variable costs at this price, production should be shut down.

Ans: shut down, because the market price is below the AVC.