ECO Assignment Week 6- The toothbrush manufacturing industry

| November 24, 2016

Scenario

The toothbrush manufacturing industry currently has 50 companies making toothbrushes. All the companies have fixed rate costs of $16 and average variable costs as follows:

Quantity (thousands)

Average Variable Cost

Variable Cost

Total Cost

Marginal Cost

Average Total Cost

1

$1

2

$2

3

$3

4

$4

5

$5

6

$6

Refer to the scenario above and complete the table columns to assist in answering the questions below:

If the price for a toothbrush is currently $10, what is the total quantity supplied in the market? Explain how you determined your answer.

As this market makes the transition to its long-run equilibrium, will the price rise or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall?

Describe the short- and long run supply curves for this market.

Scenario
You are a store manager at Bill’s Bagels. The store sells more than a dozen types of freshly made bagels and a variety of cream cheeses. They also sell bagel sandwiches at lunchtime. There is a small eat-in area in the store where customers can sit. Your boss, Bill Bayer, is worried that a local competitor is selling more bagels and charging less. He has asked you to review the data and to examine procedures. He also wants you to write your recommendations to maximize profits. Your recommendations should be in one to two pages and include rationale for your recommendations.

Bill’s Bagels is a competitive firm. The store has the following total cost and total revenue:

Quantity

0

1

2

3

4

5

6

7

Total Cost

$8

$9

$10

$11

$13

$19

$27

$37

Total Revenue

$0

$8

$16

$24

$32

$40

$48

$56

Marginal Cost

$8

$1

$1

$1

$2

$6

$8

$10

Marginal Revenue

$0

$8

$8

$8

$8

$8

$8

$8

Bill has four employees. You are the store manager, and you have three part-time staff members who make bagels and take orders. The store opens at 6:00 a.m. seven days a week and closes at 4:00 p.m., seven days a week.

Instructions

Read the scenario.
Create a one- to two-page Word document in which you answer the following questions and provide rationale for your recommendations:
Describe the three general rules for profit maximization for a competitive firm. How could you apply these rules to Bill’s Bagels?
Calculate Bill’s Bagels’ profit-maximizing price and quantity. Explain how you determined your answers. Recommend a bagel price and quantity to Bill that would maximize profit.
Consider the strategies of shutting down or exiting the market. Should Bill’s Bagels, a profit-maximizing competitive firm, consider shutting down and/or exiting the market? Should the store consider another opening and closing schedule? Make a recommendation to Bill and explain your recommendation.

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