I just suck at ecoonomics?

Question

Catfish farming is a perfectly competitive industry, and all catfish farms have the same cost curves. The market price is $25 a fish. To maximize profit, each farm produces 200 fish a week. Average total cost is $20 a fish, and average variable cost is $15 a fish. Minimum average variable cost is $12 a fish.
If the price falls to $20 a fish, will a catfish farm continue to produce 200 fish a week? Explain why or why not.
If the price falls to $12 a fish, what will the catfish farmer do?

Answer 1

If the price drops to $20 per week then the catfish farmer will produce only enoough fish to make a profit. He may continue to make 200 per week.

If the price falls to $12 per week, most will continue to produce hoping that prices will increase.

Answer 2

The catfish farmer will continue to produce where the market price is above his average variable cost. Where the price he receives is above his Average variable cost, he is putting money toward his fixed costs. So:

If his average variable cost is $15....

He will produce when the price drops to $20, because his cost to farm each fish is $15.

He will stop producing when the price drops below $15 (to $12) because his cost to farm each fish is $15, but he only receives $12 for each.

Answer 3

To maximize profit in the short run a firm has to produce product at a level where the extra cost of the last produced unit (marginal cost) is equal to the extra price given (marginal benefit).

So if the company is maximizing profit at $25 dollars/fish with an output of 200 then if you reduce price to $20, given a normal marginal cost curve in a perfectly competitive market, they will produce less fish (to maximize profit MB=MC: price = cost of last fish produced .... due to diminishing returns... cost is rising for each additional fish produced... therefore less price - less fish.)

Mininum variable cost is the lowest point/cost on the variable cost curve. The marginal cost curve slices up throught the variable cost curve at this point. Below this point (known as the shutdown point) each and every unit you produce loses money. Above this point, some units lose money but some units earn more than their cost. Overall you lose money, but would lose even more if you shutdown the factory. When marginal cost/marginal benefit is greater than average total cost you make overall economic profits.

So at $12 per fish, the firm will be indifferent to shutting down or operating... but a fraction of a cent lower causes a shutdown. (For the purposes of your question, it probably implies that since this is technically the shutdown point, the firm shuts down).

Peace