Suppose the market for T-shirts in the country of Argonia is perfectly competitive, and the price of a T-shirt is $20. A producer in this market has the following total cost and marginal cost functions:
TC(q) = 500 + 0.1q2
MC(q) = 0.2q
a. What part of the total cost function represents fixed costs?
b. Write the equation for the firm’s average variable cost.
c. Compute the number of T-shirts the firm will produce to maximize profit.
d. Compute the average total cost of producing the profit-maximizing quantity of T-shirts.
e. What is the average variable cost of producing the profit-maximizing quantity of T-shirts? Will the firm continue to operate or will it shut down?
f. Is the firm making any profit? Does this reinforce your answer to part (e)? Why or why not?