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nsert Page Layout Formulas Data Review ViewAd-ins Acrobat Home s Cut Tw Cen MT Wrap Text Copy\" Format Painter Bu a center. $ . % , a4l conditional format Formatting as Table Check Cel Number M15 I. Short-run and Long-run Equilibrium: Cost and Output Determination: Fill the red-colored cells Profit Maximiation: A Numerical Example The Valley Farm produces a quanfity quant of milk,Q,and sells each unit at the in galon market price, P Marginal Marginal Cost (MC-ATC/Aa Total Revenue Total Cost Profit Revenue in Profit in $ ATR/AQ) from Q1toQ(MR-MC) from Q-1 to Q -1. Because the farm is small compared to the world market for milk, it takes the price as given by the market conditions,3 which is $6 per gallon at the current time.4 0 12 12 17 23 30 38 47 24 36 42 48 7 1.1 How much revenue does the farm receive for the typical gallon of milk? 1.2. How much additional revenue does the farm recoive if it increases production of milk by 1 gallon? 1.3 At the production level of 2 gallons, how much does it odditionally cost to produce the third gallon of milki 14 Should the farm produce the third gallon of milk? 1.5 What is the profit maximizing production level (quantity) of milk? 1-2. As time passed by in the competitive milk market, many exits and entries of farms took place Note that average revenue = average price $6 dollars Note that marginal revenue the price at which the last product is selling dollars dollars profit goes up or down gallons Yesor No ) Profit is maximized at Q.e where MR(at Q\"-MC(at Q, where Margral Revenue Price The market has sat into the long-run equilibrium. And every farm faces the same cost function as that in the above table. SUGGESTION: calculate Average Total Cost (ATC) at each output leve 2.1 What would be the price of milk per gallon in the market? 2.2 How many gallons of milk would each farm produce dollars n the long-rum, P minimum of ATC, where ATC TC/G gallons In the long run, produces Q at which ATC is minimum

Solution

1.1. The market price is $6. Hence for one gallon of milk, the revenue received is 6 dollars.

1.2. The marginal revenue measures the additional revenue. Here it is fixed at 6 dollars for any additional gallon of milk

1.3. Production cost at 2 gallons is 8 dollars and when the third gallon is produced, the cost rises to 12, which means marginal cost of 3rd gallon is 4 dollars. Additional cost of 3rd gallon is 4 dollars

1.4. Profit is increasing till the production milk reaches 5 gallons. Hence it should produce the third gallon as profit is increased.

1.5 Profit is maximized when MR = MC. Here it is $6 when 5 gallons are produce so it is the profit maximizing production.

2.1 Long run price is minimum of ATC. Values of ATC are $5 for 1 gallon, $4 for 2 gallons, $4 for 3 gallons, $4.25 for 4 gallons and so on. Note that ATC is minimum (and constant) when 3 gallons are produced. Hence long run price is $4.

2.2. Each farm will produce 3 gallons in the long run which it observes from the ATC schedule.