1. Straker Industries estimated its short-run costs using a U-shaped average variable cost function of the form and obtained the following results. Total fixed cost TFC) at Straker Industries is $1,030.
Adjusted R Square 0.815
Coefficients Standard Error t Stat P-value
Intercept 34.62 1.99 17.40 0.0033
Q -3.65 0.44 -8.36 0.0000
Q^2 0.18 0.02 8.92 0.0000
a. What level of output (Q) is associated with the minimum AVC? What is the value of AVC at this minimum?
b. Determine equations for ATC, TC, and SMC. Graph one scatterplot of Q vs. TC, and another scatterplot of Q vs. ATC, AVC, and SMC.
c. When output is 14, how much is TC, AVC, ATC, and SMC?
d. At what amount of output does labor change from exhibiting increasing returns to decreasing returns?
2. Coffee shops in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar.
a. How could you argue that this market is not competitive?
b. Could each coffee shop face a demand curve that is not perfectly elastic?
c. How profitable do you expect coffee shops to be in the long run?