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Rumi's firm produces guitars in a perfectly competitive market. The table below shows Rumi's total variable cost. He has a fixed cost of $240 and

Rumi's firm produces guitars in a perfectly competitive market. The table below shows Rumi's total variable cost. He has a fixed cost of $240 and the price per guitar is $60.

Quantity Total Variable Cost
6 $120
7 $145
8 $165
9 $220
10 $290
11 $390

a. Calculate the average total cost of producing 7 guitars. SHOW YOUR WORK.

b. Calculate the marginal cost of producing the 8th guitar.

c. What is Rumi's profit-maximizing quantity? How do you know?

d. At the profit-maximizing quantity you determined in part (c), calculate Rumi's profit or loss. SHOW YOUR WORK.

e. Rumi also produces flutes at a LOSS in a perfectly competitive market. Draw a correctly labeled graph for Rumi's firm showing the following at a market price of $250.

  • Rumi's profit-maximizing quantity of flutes
  • Rumi's loss, completely shaded Assume that in a perfectly competitive market, a firm's costs and revenues are

marginal cost = average variable cost at $20

marginal cost = average total cost at $30

marginal cost = average revenue at $25

a. How will this firm determine the profit-maximizing level of output?

b. What price will this firm charge? Explain how the firm determined this price.

c. Should this firm produce in the short run? Why or why not?

d. Will this firm earn a profit or incur a loss? Why?

Response: [none]

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