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Homework answers / question archive / Trout farming is a perfectly competitive industry and all trout farms have the same cost curves
Trout farming is a perfectly competitive industry and all trout farms have the same cost curves.
When the market price is $40 fish, farms maximize profit by producing 800 fish a week. At this output, average total cost is $38 and average variable cost is $12 a fish. Minimum average variable cost is $7 a fish .
If the price of a fish falls to $7, the trout farmer will:
A. shut down
B. produce the? profit-maximizing output
C.continue to produce 800 fish a week
D.attempt to raise the price back to $40 a fish
E.either shut down or produce the profit-maximizing output
In the short run period, a firm should continue producing if it is making adequate revenue to cover its variable costs. That is, if the average revenue is greater than the average variable cost (P>AVC). If the price is less than the average variable cost (P<AVC), it means that the firm is not able to cover its short-run variable costs. Such a firm will be better off to shut down and produce zero output. By doing so, the firm will avoid incurring the variable expenses and the loss made in the short run will be reduced to the fixed costs.
If the market price is equal to the average variable cost (P = AVC), the firm is making just enough revenue to cover its variable costs. There is no excess revenue to cover part of the fixed cost. In such a case, the firm is indifferent between shutting down and continuing to produce in the short run.
The market price for trout is given as P = $40, profit-maximizing quantity is Q = 800, the ATC at this optimal quantity is ATC = $12, and the minimum average variable cost is AVC = $7.
If the price per fish falls to P = $7, this means that at Q = 800, P<ATC and P = AVC.
