Question 2

Assume that Hattie Industries produces bedside lamps in the perfectly competitive bedside lamp market.

1. Fill in the missing values for AFC, AVC, ATC and MC in table 1. (2 marks)

Answer:

TABLE 1

Output per week	Total Cost	AFC	AVC	ATC	MC
0	500
1	580
2	645
3	690
4	720
5	765
6	840
7	930
8	1035
9	1155
10	1305

1. Suppose the equilibrium price in the bedside lamp market is $150. How many bedside lamps should Hattie Industries produce, and using total concepts and marginal concepts show how much profit they will make? 3 mark

1. If next year the equilibrium price of bedside lamps drops to $75 due to the economy entering a recession, should Hattie Industries shut down? Explain and justify your answer using figures from table 1? 3 mark

1. Assuming Hattie Industries is operating in the short-run and factor prices are constant, at what output level does the law of diminishing returns set in? 1 mark