Everkleen Pool Services (EPS) provides weekly swimming pool maintenance in Jeddah. Dozens of firms provide this service. The service is standardized; each company cleans the pool and maintains the proper levels of chemicals in the water. The service is typically sold as a four-month summer contract. The market price for the 4-month service contract is US$115.
EPS has fixed costs of US$3500. The manager has estimated the following marginal cost function for EPS, using data for the last two years:
MC = 125 – 0.42Q + 0.0021Q2
Where MC is measured in dollars and Q is the number of pools serviced each summer. Each of the estimated coefficients is statistically significant at the 95 percent confidence level.
• Given the estimated marginal cost function, what is the average variable cost function for EPS?
• At what output level does AVC reach its minimum value? What is the value of AVC at its minimum point?
• Should the manager of EPS continue to operate, or should the firm shut down? Explain.
• The manager of EPS finds two output levels that appear to be optimal. What are these levels of output and which one is actually optimal?
• How much profit (or loss) can the manager of EPS expect to earn?
• Suppose that EPS fixed costs rise to US$4000. How does this affect the optimal level of output? Explain.