Utilizing The Chicken Wing Production Function That We Compl

6 Utilizing The Chicken Wing Production Function That We Completed I

Utilizing the chicken wing production function from the Unit 2 homework, this assignment involves analyzing the firm's production and cost data to determine optimal output levels, profitability, pricing strategies, and shutdown points for a perfectly competitive firm. The key questions include identifying the profit-maximizing output, evaluating profitability at specific prices, determining production levels when prices change, and calculating the breakeven and shutdown prices.

Paper For Above instruction

The analysis of a firm's production and cost data in a perfectly competitive market provides vital insights into operational efficiency, profitability, and strategic decision-making. In this context, we examine a hypothetical chicken wing production scenario, utilizing provided data on inputs, outputs, and cost measures. The central task is to analyze this data to identify the profit-maximizing level of output, evaluate profitability at given prices, and determine crucial price points for breakeven and shutdown decisions.

Understanding the Production Function and Cost Data

The dataset provides various measures such as marginal physical product (MPP), total fixed cost (TFC), total variable cost (TVC), total cost (TC), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC) across different levels of input (hours) and output (wings). The production function and cost data are fundamental in understanding how input changes influence output and costs, guiding optimal production decisions.

Determining the Profit-Maximizing Output

In perfect competition, the firm maximizes profit where marginal cost (MC) equals marginal revenue, which is equal to the market price (P). The data shows the prices are set at $2.50, with various costs and outputs associated with different input levels. By comparing the MC with the market price, the firm should produce at the level where MC just equals or slightly exceeds the price, ensuring profit maximization without incurring additional costs that do not bring proportional revenue increases.

From the data, at the lowest levels of output, MC appears to be around $3.82, exceeding the selling price of $2.50. As output increases, MC decreases, reaching as low as approximately $2.50 at higher levels of output. Hence, the profit-maximizing output lies where MC meets the $2.50 price, which is around the point where MC is closest to, but does not exceed, the market price, indicating the output level corresponding to the efficient production point.

Profitability at the Price of $2.50

To assess whether the firm is profitable at $2.50 per wing, we compare total revenue (TR) and total costs (TC) at the profit-maximizing output. If TR exceeds TC, the firm earns positive profit; if TC exceeds TR, the firm incurs losses.

Suppose the optimal output level is the one where MC is approximately $2.50, and the output quantity is roughly at the higher end of the dataset; calculating revenue involves multiplying the quantity by $2.50. Comparing this with the total costs at that output provides the profit or loss figure. If TR > TC, the firm is profitable; otherwise, it is experiencing a loss.

Impact of Price Drop to $2.00

When the price drops to $2.00, the profit-maximizing output must be reevaluated. The firm should produce at the point where MC equals the new market price of $2.00, which is likely at a lower output level than when the price was $2.50. If the MC at the lowest production levels is still above $2.00, it indicates that producing the current output would result in losses, and the firm must reduce production accordingly.

In fact, if the MC at the lowest output levels exceeds $2.00, the firm should consider shutting down or only producing if the price covers average variable costs. If the price of $2.00 is less than AVC at all output levels, the firm should cease production in the short run, as it cannot cover variable costs and would incur greater losses by continuing to produce.

Breakeven and Shutdown Prices

The short-run breakeven price is the minimum average total cost (ATC), where total revenue equals total costs, and the firm earns zero economic profit. This occurs at the output level where ATC is minimized; at this point, the corresponding price should match ATC.

From the data, calculating the minimum ATC provides the breakeven price. If the market price falls below this point, the firm would incur losses and might consider shutting down in the short run. The shutdown price is associated with covering average variable costs; if the price is below AVC, the firm should cease production immediately to avoid incurring additional losses.

Conclusion

This analysis underscores the importance of comparing marginal costs with market prices to determine optimal production levels. At $2.50, the firm has the potential for positive profits if it produces where MC equals the price. When prices fall to $2.00, the firm must adjust output downward, and if the price drops below AVC, it should shut down. The breakeven and shutdown prices serve as crucial benchmarks for short-term decision making, enabling the firm to operate profitably or minimize losses efficiently. These economic principles highlight the dynamic nature of production and cost management within competitive markets, guiding firms in strategic and operational choices to sustain viability in fluctuating price environments.

References

• Frank, R. H., & Bernanke, B. S. (2021). Principles of Economics (7th ed.). McGraw-Hill Education.
• Sweeney, J., & Willaman, R. (2019). Principles of Economics: A Contemporary Perspective. Routledge.