Question

Assume that the market for organic milk in Switzerland is perfectly competitive. Happy Valley, an organic milk firm, faces the following average total cost and marginal cost curves per liter of milk (stated in Swiss Franc): ATC=100/q+0.25q MC=0.5q. What are Happy Valle's total fixed costs?

Answer 1

Happy Valley's total fixed costs are CHF 100. This is found by looking at the ATC formula ATC=100/q+0.25q, where the term 100/q represents the fixed costs as it does not vary with the quantity produced.

Step-by-step explanation:

The student is asking how to calculate Happy Valley's total fixed costs given the average total cost (ATC) and marginal cost (MC) per liter of milk in a perfectly competitive market.

The ATC is provided as ATC = 100/q + 0.25q, where q is the quantity of milk produced. Since ATC comprises both variable and fixed costs, and MC, provided as MC = 0.5q, only includes variable costs, we can deduce the fixed costs by looking at the ATC equation.

To find the total fixed costs, we look at the part of the ATC formula that does not depend on the quantity, which is 100/q.

The total fixed cost is the cost that remains constant regardless of the output level, so it does not change with q. Since the value of 100/q approaches 0 as q increases, the 100 in the formula represents total fixed costs.