Discuss the costs of bagel production

Question

Assignment:

Part 1: Perfect Competition

Consider the following costs of bagel production in order to answer the next 5 questions:

Table: Costs of Producing Bagels

Quantity of Bagels (per period)	Total variable cost	Total Fixed Costs
0	$0.00	$0.10
1	0.20	0.10
2	0.30	0.10
3	0.35	0.10
4	0.45	0.10
5	0.60	0.10
6	0.80	0.10
7	1.05	0.10
8	1.35	0.10

1. What is the minimum cost output for this bagel producer? Justify your answer by discussing average total cost and marginal cost.
2. Suppose that this firm is in a perfectly competitive market where the price for bagels is $0.30/bagel. Based on what you know about perfectly competitive markets, why can't this firm charge more than $0.30 per bagel?
3. At a price of $0.30, how much profit is the firm making in profit? Show your work for full credit.
4. Suppose that the price of bagels drops to $0.10. Is the firm working at a profit, loss or point of break-even. Graphically illustrate this outcome including marginal revenue, marginal cost, and average total cost with price on the y axis and quantity on the x-axis.
5. What is the shut-down cost of this firm? Assuming that other firms have a shut-down price of $0.18, will this bagel company be part of the supply curve for this industry? Explain fully.

Part 2: Imperfect Competition

Two identical firms make up an industry in which the market demand curve is represented by ??= 1250 - 1/4??where Q is the quantity demanded and P is the price per unit. Assuming production is split evenly between the two firms, the marginal revenue function for each firm is ??= 1250 -??and the collective marginal revenue function is ??= 1250 -1/2??. The marginal cost of producing the good in this industry is constant and equal to $650 while fixed costs are zero.

1. If both firms are acting as monopolists, what quantity will each firm produce? How much will the two firms produce collectively?
2. If both firms are acting as monopolists, what price are they able to charge on the market? Show your work.
3. What is the loss to society as a result of the monopolists' decisions? Who is bearing the cost of the monopolists decisions? Explain fully.
4. Suppose that firm 1 decides to "cheat" and produce an extra 100 units of the good. What happens to the market price (give the new market price)? What is the amount of the price effect (loss) and the quantity effect (gain) for the cheating duopolist? (remember that the duopolist was only producing half of total production prior to cheating). Was this a good decision for the duopolist? Explain fully using economic rationale!
5. What options do each of the firms have going forward? Fully explain the Nash equilibrium and a cooperative strategy and how each of these outcomes could arise.