Pictured are the Marginal Cost, Average Variable Cost and Average

| November 24, 2016

Pictured are the Marginal Cost, Average Variable Cost and Average Total Cost schedules of a contract sewing factory which produces women’s blouses for major clothing retailers. Prices are contract prices per dozen blouses. Quantities are thousands of dozens per month. Arrows show some Price – Quantity combinations on the cost curves. Assume that there are 500 firms in the market and all are using the same technology as this firm.

a) What is the minimum efficient scale of production for this firm? Explain in a sentence or two
b) At what level of output does the firm start to experience diminishing marginal productivity of its variable inputs? Explain in a sentence or two.
c) If the current market price is $95/dozen, how much will this firm produce per month?
d) Is this the long run equilibrium price in this market? Explain your answer in detail and if there is a different equilibrium price identify that price.
e) What would be the effect of a sharp rise in the price of cotton assuming the higher cotton price persisted into the long run? Which curves would be affected? How would the long run equilibrium price change and would the Minimum efficient scale of production change?

Pictured are the Marginal Cost, Average Variable Cost and Average Total Cost schedules
of a contract sewing factory which produces women’s blouses for major clothing
retailers. Prices are contract prices per dozen blouses. Quantities are thousands of dozens
per month. Arrows show some Price – Quantity combinations on the cost curves. Assume
that there are 500 firms in the market and all are using the same technology as this firm.
a)
b)
c)
d)
e)

What is the minimum efficient scale of production for this firm? Explain in a
sentence or two
At what level of output does the firm start to experience diminishing marginal
productivity of its variable inputs? Explain in a sentence or two.
If the current market price is $95/dozen, how much will this firm produce per
month?
Is this the long run equilibrium price in this market? Explain your answer in
detail and if there is a different equilibrium price identify that price.
What would be the effect of a sharp rise in the price of cotton assuming the higher
cotton price persisted into the long run? Which curves would be affected? How
would the long run equilibrium price change and would the Minimum efficient
scale of production change?

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