1. Strakers Industries estimated its short run costs using a u-shaped average variable cost function of the form AVC=a+bQ+cQ^2 and obtained the following results. Total fixed cost (TFC)at Straker Industers is $1,030.
Adjusted R Square 0.815
Standard
Coefficients 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. Suppose the market demand and supply functions are QD = 180 - 1.5P and QS = 3.5P + 40. You have just graduated and moved to this city; as a new MBA and an entrepreneur, you are considering entering the market for this product.
a. Determine the equilibrium price and quantity in this market.
b. You've researched and found that most firms in the market currently experience costs such that TC = 15 + 45Q - 10Q2 + 1.5Q3. Determine whether or not you should enter this market. Use graphs to support your answer.
c. Due to unforeseen delays, you don't enter the market. However, a year later the market supply has changed to QS= 3.5P + 10. Are you surprised at this shift in supply?
d. Given the new supply conditions, determine whether or not you should enter the market.