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The Table 2 below gives costs for bicycle repairs at Packy's Bike Shop
The Table 2 below gives costs for bicycle repairs at Packy's Bike Shop. Each worker is paid $150 a day. Labor costs are the only variable costs of production.
Table 2:
Labor (workers) Output (bikes) TFC (dollars) TVC (dollars) TC (dollars) ATC (dollars) AVC (dollars) MC (dollars) 0 0 150 1 20 150 2 32 3 40 4 45
Using the above information, calculate:
a) Total fixed cost (TFC), total variable cost (TVC), total cost (TC), average total cost (ATC), average variable cost (AVC) and marginal cost (MC). [12 marks]
b) Assume that the bike shop operates in a perfectly competitive firm and the market price is $30.00. Based upon this information, determine the profit-maximizing output by using the marginal analysis approach. Justify your answer. [4 marks]
c) Calculate the profit at the profit-maximizing output in (b). Given this result, what should you expect to happen in the bike shop market.
Expert Solution
(b) If P= $30 , then the profit maximizing output is 45 units at which P=MC.
(c) Profit = TR-TC = (30*45) - 750 = $600
Because the firms are earning positive profits, therefore new firms will enter into the bike shop market.
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