QUESTION 3

a. Calculate average variable cost, average total cost, and marginal cost for each quantity.

Quantity Variable Total Average Average Marginal

Cost Cost Variable Cost Total Cost Cost
0 $0.00 $30.00 --- --- ---
1 10.00 40.00 $10.00 $40.00 $10.00
2 25.00 55.00 12.50 27.50 15.00
3 45.00 75.00 15.00 25.00 20.00
4 70.00 100.00 17.50 25.00 25.00
5 100.00 130.00 20.00 26.00 30.00
6 135.00 165.00 22.50 27.50 35.00

b. Graph all three curves. What is the relationship between the marginal-cost curve and the average-total-
cost curve? Between the marginal-cost curve and the average-variable-cost curve? Explain.

The marginal-cost curve is below the average-total-cost curve when output is less than four and
average total cost is declining. The marginal-cost curve is above the average-total-cost curve when
output is above four and average total cost is rising.

QUESTION 4
a. Compute marginal cost and average total cost.

Quantity Average Variable Variable Cost Total Cost Marginal Cost Average
Cost Total Cost
1 1 1 17 1 17
2 2 4 21 3 10.5
3 3 9 26 5 8.67
4 4 16 32 7 8
5 5 25 41 9 8.2
6 6 36 52 11 8.67
b. If the price is $10, each firm will produce five units, so there will be 5 × 100 = 500 units supplied in the
market.

c. At a price of $10 and a quantity supplied of five, each firm is earning a positive profit because price is
greater than average total cost. Thus, entry will occur and the price will fall. As price falls, quantity
demanded will rise and the quantity supplied by each firm will fall.

d. The graph below shows the long-run industry supply curve