Question 1Leather Comfy produces leather sofas. There are many other furniture companies thatproduce similar leather sofas. Leather Comfy has collected data on its average variable costsof production for the past 12 months. The costs have been adjusted for inflation by deflatingwith an appropriate price index. Monthly fixed cost is $20,000 per month. The AVC andassociated output data are presented below:Month Q AVC ($)Jan 2010 220 2080Feb 2010 310 2020Mar 2010 310 2060Apr 2010 250 2140May 2010 410 1740Jun 2010 410 2030Jul 2010 450 1720Aug 2010 450 1580Sep 2010 450 1730Oct 2010 620 1700Nov 2010 620 1520Dec 2010 700 1750(a) Plot a scatter diagram of AVC on the vertical axis and Q on the horizontal axis. Fit thescatter diagram with a 2nd degree polynomial trend line. Do you think the scatterdiagram of AVC suggests the functional form: AVC  a  bQ  cQ2 ? Explain briefly.[You could use statistical software, such as Microsoft Excel, SPSS or Statistix, to plotthe scatter diagram before you copy and paste the chart onto your Word document.](10 marks)ECO201e Assignment 2SIM UNIVERSITY Assignment 2 – Page 3 of 4(b) Use a statistical software to run the appropriate regression to estimate the parametersfor the empirical cost function AVC = a + bQ + cQ2. Rearrange the regression outputaccording to the format given in the textbook/lecture notes. Attach your regressionoutput from the statistical software as part of your answer.[To run the regression, you need to first create another column of data for Q-square.Your y-axis variable (or dependent variable) is thus AVC, while your two explanatoryvariables are Q and Q-square.](12 marks)(c) Evaluate the results of your regression. Specifically discuss algebraic signs of theparameters, their statistical significance, and the goodness of fit. Use a 5 percentsignificance level for the test on statistical significance.(8 marks)(d) Present the estimated average variable cost, total variable cost, and short-run marginalcost functions.(9 marks)(e) (i) At what level of output does AVC reach its minimum value?(3 marks)(ii) What is the minimum value of AVC?(2 marks)(iii) Indicate the minimum AVC on the trend line in your scatter plot in (a).(2 marks)(iv) Clearly explain the significance of this point in determining the shut-downcondition.(10 marks)(f) Compute AVC and SMC when Leather Comfy produces 200 units of output.(4 marks)(g) From the result you have obtained in (f), is AVC rising or falling when Leather Comfyproduces 200 units? Briefly explain.(5 marks)(h) Without any further computation and just by looking at your earlier answer(s), at whatlevel of output does SMC equal AVC? How did you get this answer?(5 marks)(i) What is the optimal level of monthly production for Leather Comfy if the marketprice of leather sofas is $2200 per unit? What is the maximum profit (minimum loss)Leather Comfy can expect to earn?(10 marks)ECO201e Assignment 2SIM UNIVERSITY Assignment 2 – Page 4 of 4(j) What is the optimal level of monthly production for Leather Comfy if the marketprice of leather sofas is$1500 per unit? What is the maximum profit (minimum loss)Leather Comfy can expect to earn?(10 marks)(k) Suppose all firms in the leather sofa industry are currently earning economic profit.Explain what will happen in the long run.