Author Question: Lentz's Incorporated sells paper in a perfectly competitive market at a price of 2 per ream. At the ... (Read 120 times)

james9437 · **on:** Jun 29, 2018

Lentz's Incorporated sells paper in a perfectly competitive market at a price of 2 per ream. At the profit-maximizing (cost-minimizing) level of output, average total cost is 2.50 per ream and average variable cost is 1.95 per ream.

Should the firm continue to operate in the short run? Explain.

Question 2

Evaluate the following statement. As long as I am still enjoying this candy I am going to keep buying and eating more of it.

What will be an ideal response?

jjorrostieta · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Yes. The price of the firm's product (2) is greater than its average variable cost (1.95). This implies that the firm's revenues will be sufficient to cover all of the firm's variable costs and some of its fixed costs. Thus, it will earn a smaller loss if it operates.

Answer to Question 2

This confuses marginal and total utility. While it might be true that he is still receiving positive marginal utility from eating more of the candy it might not be the most rational thing for him to do in order to maximize his total utility. That is, he might be better off redirecting some of this expenditures toward another good that has a higher marginal utility per dollar.