Problem: 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
Q1. Plot the average cost, average variable cost, marginal cost, and price on a graph
Q2. 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.
Q3. Suppose the firm does enter the market and that over time increasing competition causes the price of telephones to fall to $35. What impact will this have on the firm's productions levels and profit? Explain what would you advise this firm to do?