Bob produces DVD movies for sale, which requires a building and a machine that copies the original movie onto a DVD. Bob rents a building for $30,000 per month and rents a machine for $20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying table.
Quantity of DVDs VC
0………………………………. $0
1,000…………………………. 5,000
2,000…………………………. 8,000
3,000…………………………. 9,000
4,000…………………………. 14,000
5,000…………………………. 20,000
6,000…………………………. 33,000
7,000…………………………. 49,000
8,000…………………………. 72,000
9,000…………………………. 99,000
10,000…………………………. 150,000
a. Calculate Bob's average variable cost, average total cost, and marginal cost for each quantity of output.
b. There is free entry into the industry, and anyone who enters will face the same costs as Bob. Suppose that currently the price of a DVD is $25. What will Bob's profit be? Is this a long-run equilibrium? If not, what will the price of DVD movies be in the long run?