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  • Module 4 Peer Review Explanation 1

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    The document provides explanations for questions in a Module 4 Peer Review Assignment about a firm facing conventional technology with U-shaped average variable costs. The summary is: 1) The optimal short run output is 1000 units, as shown by the intersection of marginal revenue and marginal cost curves. However, it cannot be determined if this is a short run equilibrium without knowing profits. 2) An average total cost curve is added showing zero profits at an output of 1000, depicting a short run equilibrium. 3) Another average total cost curve is shown resulting in negative profits at an output of 1000. Adding an average variable cost curve indicates the firm should continue producing 1000 units rather than shutting down, to partially offset fixed

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    The document provides explanations for questions in a Module 4 Peer Review Assignment about a firm facing conventional technology with U-shaped average variable costs. The summary is: 1) The optimal short run output is 1000 units, as shown by the intersection of marginal revenue and marginal cost curves. However, it cannot be determined if this is a short run equilibrium without knowing profits. 2) An average total cost curve is added showing zero profits at an output of 1000, depicting a short run equilibrium. 3) Another average total cost curve is shown resulting in negative profits at an output of 1000. Adding an average variable cost curve indicates the firm should continue producing 1000 units rather than shutting down, to partially offset fixed

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    9 views4 pages

    Module 4 Peer Review Explanation 1

    Uploaded by

    duong duong
    The document provides explanations for questions in a Module 4 Peer Review Assignment about a firm facing conventional technology with U-shaped average variable costs. The summary is: 1) The optimal short run output is 1000 units, as shown by the intersection of marginal revenue and marginal cost curves. However, it cannot be determined if this is a short run equilibrium without knowing profits. 2) An average total cost curve is added showing zero profits at an output of 1000, depicting a short run equilibrium. 3) Another average total cost curve is shown resulting in negative profits at an output of 1000. Adding an average variable cost curve indicates the firm should continue producing 1000 units rather than shutting down, to partially offset fixed

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 4

    Module 4 Peer Review Explanation

    Below are explanations for the questions in the Module 4 Peer Review Assignment.

    Prompt
    Consider a firm facing conventional technology with U-shaped AVC and ATC and MC. The firm
    wants to maximize profits given an exogenously fixed price of P = $20. Further, suppose the firm
    correctly determines that its short run profit maximizing output is 1000 given its costs and the fixed
    price of $20.

    Questions 1A and 1B

    Depict marginal revenue and marginal cost curves that would support the conclusion that the optimal
    short run output is q = 1000. Be sure to label all important values.

    Is this a short run equilibrium? Explain.

    Explanation:
    MR = MC is the profit maximizing output, which we know is Q = 1000. We cannot answer whether
    this is a short run equilibrium because we do not know the size of profits.

    Questions 2A and 2B

    Reproduce your graph from Question 1, but add an average total cost curve to the picture in such a
    way that the firm is earning zero profits (π = 0).

    Does your graph depict a short run equilibrium? If so, explain why. If not, explain why not.

    Explanation:
    This is a short run equilibrium.

    Questions 3A and 3B

    Again, reproduce your graph from Question 1. For this question, depict a different ATC curve, one
    where the firm has negative profits (π < 0) at the profit maximizing output of 1000. Add an additional
    average cost curve that will allow you to determine whether to shutdown or keep producing at Q =
    1000.

    Should the firm produce Q = 1000 in the short run or should it shutdown, producing Q = 0?

    Explanation:
    Since ATC at 1000 is greater than price, we know profits are negative. The firm cannot change the
    exogenously given price (20), and it cannot exit in the short run so fixed costs are positive (FC>0).
    Until the firm can find a buyer for its FC, it should either produce where MR = MC or it should lock its
    doors, an event called shutdown. Adding the AVC, as shown above, tells us that shutdown would be
    wrong. Since the price of 20 is greater than the AVC at Q = 1000, the firm is better off by producing
    1000. It earns some money above VC, which can be used to partially offset the FC.

    Algebraically, π = Q[P – ATC]. Since price is less than ATC at Q = 1000, we know that profits are
    negative. The shaded area indicates the size of profits. It is defined by the rectangle with Q length
    and [P-ATC] < 0 as its height.

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