# e. What is the lowest price at which the firm would operate ( > 0) in the short-run?

Problem Set 7 Name: ________________________________________ Due March 22nd, 2019 1. The table below shows the relationship between how many scoopers an ice-cream shop staffs

and the number of ice-cream cones sold each day. Each scooper is paid $100 per day and the ice-cream shop has fixed costs equal to $100 per day.

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Scoopers Ice-Cream Cones 0 0 1 80 2 130 3 170 4 195 5 205

In the summer the market price for ice-cream is $3.

a. How many workers should be staffed each day in the summer?

b. How much profit will the ice-cream shop earn each day during the summer?

Demand for ice cream is lower in the winter, so the market price drops to $2.25.

c. How many workers should be staffed each day in the winter?

d. How much profit will the ice-cream shop earn each day during the winter?

Suppose the firm’s fixed costs decrease to $80 per day.

e. In the short-run how will the decrease in fixed costs affect the firm’s profits?

Circle One: Increase Decrease Unchanged

f. How will the decrease in fixed costs affect the number of workers that the firm staffs?

Circle One: Increase Decrease Unchanged

2. The graph above shows the cost curves for an individual firm producing t-shirts, answer the following three questions, assuming that the market for t-shirts is perfectly competitive.

a. If the market price is P = $32, what quantity of t-shirts will the firm choose to produce?

b. If the market price is P = $32, how much profit will the firm earn? Label on the graph.

c. Using the equation for profit, demonstrate that the firm’s profit will equal $0 when the

price of t-shirts is $20.

d. If the market price is P = $8, what quantity will the firm produce? How much profit will it earn?

e. What is the lowest price at which the firm would operate ( > 0) in the short-run?

MC P

Q

ATC

AVC

8 14 17 21 2

8

20 23 25

32

5

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