533564463
3/7/16
Suppose grapes are grown in a perfectly competitive market. Short-run costs for a grape
farmer are given in the table below.
Output
(bushels)
0
1
2
3
4
5
6
7
8
9
10
TFC
TVC
TC
MC
$500
$500
$500
$500
$500
$500
$500
$500
$500
$500
$500
$0
150
200
260
340
450
590
770
1000
1290
1650
500
650
700
760
840
950
1090
1270
1500
1790
2150
X
150
50
60
80
110
140
180
230
290
360
a. Add a column to the table above and compute marginal cost (MC) for each level of
output.
b. If the price of a bushel of grapes is $230, find the profit maximizing level of output.
Compute the level of profit each producer would earn.
Q=8.
Profit = 230*8 – 1500 = $340
c. Suppose the price of grapes drops to $180. How much would the firm produce and how
much short-run profit would be earned?
Q=7.
Profit = 180*7 – 1270 = -$10
d. Finally, repeat the process with a price of $80.
Q=0. This is a shutdown situation.
Profit = 0 – 500 = -$500
Note: if the firm produced where P=MR=MC, at Q=4 profit = -$520