Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost is comprised of the wages paid to the cooks and the food ingredients. The variable cost associated with each level of output is given in the accompanying table.

Quantity of meals
0
10
20
30
40
50

VC
$0
200
300
480
700
1,000


a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.

b. What is the break-even price? What is the shut-down price?

c. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?

d. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?

e. Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?


Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it.

a. A profit-maximizing firm should select the output level at which the difference between the market price and marginal cost is greatest.

b. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run.