The Wood Merchant

Wood merchants operating from the east coast of Tasmania supply Hobart with firewood in a perfectly competitive market. The wood delivery industry is perfectly competitive and the market price is $60 a tonne. Suppose at the current level of output of 80 tonnes a month, a wood merchant faces a marginal cost MC of $40 per tonne, an average cost AC of $55 per tonne and an average variable cost AVC of $50 per tonne.

(a)Is average cost falling or rising?Is average variable cost falling or rising?

(b)Sketch the firm's current position showing the average cost AC and average variable cost AVC curves, the marginal cost MC curve and the average and marginal revenue curves.

(c)What production advice would you give this firm - increase/decrease/stay the same?Why?

(d)How would this advice change if the price fell to $52 per tonne?

(e)How would this advice change if the price fell to $40 per tonne?