Developing the market supply curve

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Assignment:

Question - "Firm" Profit Decision Making

As demonstrated in the lecture notes (Developing the Market Supply Curve - Table A: Profit Analysis - ABC Fishing Inc. (Constant Price with Output)), the market price and the firms cost structure impact on the firm's optimal production and profit. The profit maximizing firm expands production until the marginal cost of producing the last unit is equal to the marginal revenue received from the sale of the last unit. Price of catch was independent of the level of catch sold. This approximates the case of many small enterprises engaged in perfectly competitive markets.

1. In the lecture notes (Table A) the market price was $125. Given the firms technology and cost structure, is there a market price below which the firm may choose not to operate (i.e., a market exit price)? What is this price (approximate)? If yes, explain why they would decide not to fish below this price.

2. If the price were 10% higher than the market exit price would the firm engaged in fishing activity? If yes, why would it be in their economic interest to do so? (Hint - what do we know about their financial obligations related to the fishing business).

3. If ABC Fishing Inc. fishing removals were limited to 3 MT (fishing quota) at a market price of $50, would they continue to fish? Explain why or why not?

4. The theory of the profit maximizing firm presented in the lecture notes is designed to illustrate the marginal concept. The theory suggests that firms (including our generic fishing enterprise - ABC Fishing Inc.) adhere to an economic axiom rather than alternative business strategies. Why might our generic enterprise not follow the "marginal rule" in their fishing behaviour in any given fishing season - explain one example (hint - how might they react to a change in the ocean and/or business environment in which they operate).

5. In some countries there are high levels of excess capacity in the fishing fleet (idle fishable boat days given low quotas). In this situation, how might the availability of new additional quota challenge the lectures assumption off diminishing returns to a fix factor (e.g., variable factor (crew) applied to fixed capital (boat))?

Reference no: EM133285451

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