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Based on the following filled in table, we can see how a price taker (seller with no control over the price) will make decisions. (note: these examples may differ from those used in your particular class).

Suppose the price of the product in this market is $0.67

1. If the price is above the minimum AVC, the seller will produce. In this case, the minimum AVC is $0.5714, so the seller will produce (open up, rather than shut down).

2. The seller will produce every unit of the good that has a marginal cost less than the price. The marginal cost of producing 4703 units is less than the price ($0.6329 is less than $0.67), but the marginal cost of producing 4850 would be too high ($0.6803 is higher than $0.67), so 4703 will be produced.

3. The profit of producing 4703 units is the revenue minus the total cost, or the (price minus the average total cost) times the selected output. This is ($0.67-$0.7867)x4703 = -$548.84. Although the seller is making a loss, it is better off by producing, since its fixed cost is $1000.00, and not producing anything would result in a loss of that much; losing $548.84 is better than losing $1000.

If the price of the product was $1.00 instead,

1. If the price is above the minimum AVC, the seller will produce. In this case, the minimum AVC is $0.5714, so the seller will produce (open up, rather than shut down).

2. The seller will produce every unit of the good that has a marginal cost less than the price. The marginal cost of producing 5202 units ($0.9804) is less than the price, so output would be 5202. The marginal cost of producing 5286 would be too high ($1.1905 is higher than $1.00), so 5202 will be produced.

3. The profit of producing 5202 units is the revenue minus the total cost, or the (price minus the average total cost) times the selected output. This is ($1.00-$0.7882)x5202 = $1,101.78

Copyright 2006 by Ray Bromley. For economics information, and other information about Ray Bromley, visit www.raybromley.com. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.
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