Question

A manufacturer of electronics products is considering entering the telephone equipment business. It estimates that if it were to begin making wireless telephones, its short-run cost function would be as follows.

Q(thousands) AVC AC MC _____________________________________________________________________

9 41.10 52.21 30.70
10 40.00 50.00 30.10
11 39.10 48.19 30.10
12 38.40 46.73 30.70
13 37.90 45.59 31.90
14 37.60 44.74 33.70
15 37.50 44.17 36.10
16 37.60 43.85 39.10
17 37.90 43.78 42.70
18 38.40 43.96 46.90
19 39.10 44.36 51.70
20 40.00 45.00 57.10

a. Plot the average cost, average variable cost, marginal cost, and price on a graph

b. Suppose the average wholesale price of a wireless phone is currently $50. Do you think this company should enter the market? Explain. Indicate on the graph the amount of profit (or loss) earned by the firm at the optimal level of production.

c. Suppose the firm does enter the market and that over time increasing competition causes the price of telephones to

Answer 1

Answer on Question #52667, Economics, Microeconomics

a. A manufacturer of electronics products is considering entering the telephone equipment business.

Q AVC AC MC

9 41.10 52.21 30.70

10 40.00 50.00 30.10

11 39.10 48.19 30.10

12 38.40 46.73 30.70

13 37.90 45.59 31.90

14 37.60 44.74 33.70

15 37.50 44.17 36.10

16 37.60 43.85 39.10

17 37.90 43.78 42.70

18 38.40 43.96 46.90

19 39.10 44.36 51.70

20 40.00 45.00 57.10

b. If the average wholesale price of a wireless phone is currently $50, it will produce 19 telephones, for which P = MR = MC = 50. At this quantity P > ATC (50 > 44.36), so this company should enter the market.

c. Suppose the firm does enter the market and that over time increasing competition causes the price of telephones to fall. In this case the firm in the long-run will earn normal profit.

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