Microeconomics · free preview
Costs Drive Supply
A price-taking firm produces where price covers marginal cost, its supply curve is the marginal cost curve above minimum average variable cost, and prices below that trigger shutdown now and exit later.
1. The firm meets the price
The firm meets the price
2. The shutdown question
The shutdown question
3. The exit question
The exit question
4. The industry's supply, briefly
The industry's supply, briefly
5. Where to produce
A price-taking bakery faces a market price of 6 dollars a loaf. Its marginal cost of the 90th loaf is 4 dollars and of the 100th is 6 dollars, rising thereafter. How much should it produce?
6. Shutdown arithmetic
At its current output a firm's price is 5 dollars, average variable cost is 4 dollars, and average total cost is 6 dollars. In the short run, should it operate or shut down?
7. The shutdown boundary
A firm's minimum average variable cost is 3 dollars per unit. The market price currently sits at 2 dollars and the firm sells zero units. If the price rises to exactly the minimum of AVC, compute how many dollars of price increase that is, and write the number.
8. Where to stop baking
A price-taking bakery faces a price of 6 dollars a loaf. The marginal cost of the 90th loaf is 5.50 dollars and of the 91st loaf is 6.50 dollars. How many loaves should it sell?
9. The shutdown verdict
A firm's minimum average variable cost is 4 dollars per unit and the market price is 3.50 dollars. What should it do in the short run?
10. Supply at a starvation price
A firm's minimum average variable cost is 3 dollars per unit and the market price is 2.50 dollars. How many units should it supply in the short run, and write the number?
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