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# ATC curve

1. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop's average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve. Bob's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost)

2. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?

3. At its current level of production a profit-maximizing firm in a competitive market receives \$12.50 for each unit it produces and faces an average total cost of \$10. At the market price of \$12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why?

4. There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Using your understanding of monopolies, discuss the likely effect of deregulation on prices in these two industries.

5. Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oligopoly market. How does this differ from output and price effects in a monopoly market?

#### Solution Preview

1. The reason that the ATC curve slopes downward at first is because the total cost for each unit produces falls when production first begins. You can see this if you imagine what happens when a shop first opens. The owner needs to pay a certain amount for rent, equipment, and other fixed costs. The first bagel he sells then would have an enormous average total cost. It would be the cost of all these fixed costs divided by only 1. But as more and more bagels are sold the fixed costs decline up to a certain point, where diminishing marginal returns set in.

2. A competitive firm maximizes profits by setting its marginal revenue equal to marginal cost. It can determine this point by ...

#### Solution Summary

Issues of deregulating electricity and natural gas delivery companies in the United States and other topics are highlighted.

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