4. Suppose a given firm operating in a perfectly competitively market. TFC = $ 7000, TVC = $ 5000 and TR = $6000. A. Should the firm stay in the business, under the current situation? B. What will be your answer if the TR changes to $ 400?
Answers
1. Suppose Tub-A-Lub is a plastic swimming pool manufacturer and the plastic swimming pool
industry is perfectly competitive. Tub-A-Lub can sell each swimming pool for $110 and has
marginal costs indicated in the table below.
Quantity TVC Marginal Cost
0 0
90
1 90
70
2 160
60
3 220
80
4 300
95
5 395
105
6 500
115
7 615
125
8 740
a) Suppose Tub-A-Lub’s total fixed cost is $150. Assume that Tub-A-Lub can only produce
integer number of pools (i.e., no fractions of pools). How many swimming pools does Tub-A-
Lub produce in the short run? What is Tub-A-Lub’s profits in the short run? Show calculations.
What does Tub-A-Lub do in the long run?
The marginal revenue of a pool is $110. In the short run, Tub-A-Lub will produce 6 pools
(they will produce the sixth because MC<MR and not produce the seventh because
MC>MR).
TR=110x6=660 , TVC=90+70+60+95+105=500 , TFC=150
Profits=660-500-150=+10
In the long run, Tub-A-Lub stays in business and continues to produce 6 because profits are
positive (assuming price and costs do not change).
b) Suppose Tub-A-Lub’s total fixed cost is $200. Assume that Tub-A-Lub can only produce
integer number of pools (i.e., no fractions of pools). How swimming pools does Tub-A-Lub
produce in the short run? What is Tub-A-Lub’s profits in the short run? Show calculations. What
does Tub-A-Lub do in the long run?
The marginal revenue of a pool is still $110 and the change in fixed costs from $150 to $200
does not change marginal costs. Therefore, Tub-A-Lub will still produce 6 pools in the
short run.
TR=110x6=660 , TVC=90+70+60+95+105=500 , TFC=200
Profits=660-500-200=-40
In the long run, Tub-A-Lub exits the industry because profits are negative (assuming price
and costs do not change).