Ted has been a fisherman all of his life. Ted realizes the risk he takes as a business whose market structure is a perfectly competitive market. Ted is analyzing whether he should stay in business. He is fortunate that all of his nets, fishing gear are all paid for but Ted still has other fixed and variable costs that he incurs as a part of doing business.

Help Ted analyze his cost information and serve as his business consultant.

Here is some cost information that Ted has given you:

Fixed Costs are $50,000 per year. Insurance, dock space, and rental of fish processing equipment.

1. What is the lowest Average Total Cost that Ted can operate his business? In other words, at what cost do we reach the bottom of the average total cost curve?

2. At a market price of $51 per fish, what quantity does Ted process and what is the firm’s accounting profit at this output? (remember the profit maximization rule)

3. At a market price of $45 per fish, what quantity does Ted process and what is the firm’s accounting profit at this output?

Answer:

1) the lowest average total cost is obtained when fishing and processing 2,000 fish and it is $45 per fish

2) If the market price is $51 per fish, then Ted should be producing at full capacity = 3,000 fish and will make $12,990 in profits

3) If the market price is $45 per fish, then Ted should be producing 2,000 fish, but will not be making any profit

Explanation:

lowest average total cost:

ATC (1,000 fish) = ($50,000 + $25,000) / 1,000 = $75 per fish

ATC (2,000 fish) = ($50,000 + $40,000) / 2,000 = $45 per fish

ATC (3,000 fish) = ($50,000 + $90,000) / 3,000 = $46.67 per fish

if market price = $51

profit (1,000 fish) = ($51 - $75) x 1,000 = -$24,000

profit (2,000 fish) = ($51 - $45) x 2,000 = $12,000

profit (3,000 fish) = ($51 - $46.67) x 3,000 = $12,990

if market price = $51

profit (1,000 fish) = ($45 - $75) x 1,000 = -$30,000

profit (2,000 fish) = ($45 - $45) x 2,000 = $0

profit (3,000 fish) = ($45 - $46.67) x 3,000 = -$5,010