1. Consider a price-taking firm in the competitive industry for raw chocolate. The market demand and supply functions for raw chocolate are estimated to be

Chocolate demand: Q = 10,000 - 10,000P + 2M

Chocolate supply: Q = 40,000 + 10,000P - 4,000PI

where Q is the number of 10 pound bars per month, P is the price of a 10 pound bar of raw chocolate, income is M, and PI is the price of cocoa (the primary ingredient input). The manager of ABC Cocoa Products uses time-series data to obtain the following forecasted values of M and PI for 2008:

M = $25,000 and PI = $10

The manager of ABC Cocoa also estimates its average variable cost function to be

AVC = 3.0 - 0.0027Q + 0.0000009Q²

Fixed costs at ABC will be $1,600 in 2008.

Should ABC Cocoa produce or shut down?