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3. Perry's Ice Cream is part of a competitive ice cream industry and has a total cost function C = 50 +|4q + 2q2/and a
3. Perry's Ice Cream is part of a competitive ice cream industry and has a total cost function C = 50 +|4q + 2q2/and a marginal cost function MC = 4 + 4q. At the given market price of $20/palate of ice cream, the firm is producing 5 palates. a. What is the firm's profit at this given level of output? 20.5 (=50 + 49 + 29- MC = 4 + 4 9 TI = R- C C = 50 + 4 ( 5) + 2 (5 ) 2 100- 120 ) ( = 50+ 20+ 2( 25 ) C= 70+50 - 20 ) C= TWO b. Is the firm maximizing profit? If not, how many palates should Perry's produce in the short run? How much profit does Perry's make at the profit maximizing output level? If Perry's is expecting that the price for ice cream will improve much more in the near future (say increase to $30/palate), should it shut down or keep operating? [Hint: You can use graph to help, but not required] Shitdown we here is that the firm will keep producing if the profits are above the AVC (average variable cost). P = MC 4 9+292 4+ 29 20 = 4+ 49 9 AVC - 4 4+2 ( 4 ) 9 = 4 3 4+8 - TZEAVC Because marginal cost is higher than the average variable cost, they stay in operation
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