5. Profit maximization and shutting down in the short run The following graph plots daily cost curves for a firm operating in the competitive market for jumpsuits. 50 45 40 PRICE (Dollars per jumpsuit) 15 8 8 ATC 10 AVC MC 5 о 2 4 R A 10 12 14 16 1R 20 QUANTITY (Thousands of jumpsuits) Using the following table, for each price level, calculate the optimal quantity of units for the firm to produce. Using the data from the graph to determine the firm's total variable cost, calculate the profit or loss associated with producing that quantity. Assume that if the firm is indifferent between producing and shutting down, it will choose to produce. (Hint: Select purple points [diamond symbols) on the graph to receive exact average variable cost information.) Price Quantity (Dollars per jumpsuit) (Jumpsuits) Total Revenue Fixed Cost Variable Cost (Dollars) (Dollars) (Dollars) Profit (Dollars) 12.50 135,000 27.50 45.00 135,000 135.000 If the firm shuts down, it must incur its fixed costs (FC) in the short run. In this case, the firm's fixed cost is $135,000 per day. In other words, if it shuts down, the firm would suffer losses of $135,000 per day until its fixed costs end (such as the expiration of a building lease). This firm's shutdown price-that is, the price below which it is optimal for the firm to shut down-is per jumpsuit.
5. Profit maximization and shutting down in the short run The following graph plots daily cost curves for a firm operating in the competitive market for jumpsuits. 50 45 40 PRICE (Dollars per jumpsuit) 15 8 8 ATC 10 AVC MC 5 о 2 4 R A 10 12 14 16 1R 20 QUANTITY (Thousands of jumpsuits) Using the following table, for each price level, calculate the optimal quantity of units for the firm to produce. Using the data from the graph to determine the firm's total variable cost, calculate the profit or loss associated with producing that quantity. Assume that if the firm is indifferent between producing and shutting down, it will choose to produce. (Hint: Select purple points [diamond symbols) on the graph to receive exact average variable cost information.) Price Quantity (Dollars per jumpsuit) (Jumpsuits) Total Revenue Fixed Cost Variable Cost (Dollars) (Dollars) (Dollars) Profit (Dollars) 12.50 135,000 27.50 45.00 135,000 135.000 If the firm shuts down, it must incur its fixed costs (FC) in the short run. In this case, the firm's fixed cost is $135,000 per day. In other words, if it shuts down, the firm would suffer losses of $135,000 per day until its fixed costs end (such as the expiration of a building lease). This firm's shutdown price-that is, the price below which it is optimal for the firm to shut down-is per jumpsuit.
Chapter8: Perfect Competition
Section: Chapter Questions
Problem 4.7P
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Transcribed Image Text:5. Profit maximization and shutting down in the short run
The following graph plots daily cost curves for a firm operating in the competitive market for jumpsuits.
50
45
40
PRICE (Dollars per jumpsuit)
15
8 8
ATC
10
AVC
MC
5
о
2
4
R
A
10
12 14 16
1R 20
QUANTITY (Thousands of jumpsuits)
Using the following table, for each price level, calculate the optimal quantity of units for the firm to produce. Using the data from the graph to
determine the firm's total variable cost, calculate the profit or loss associated with producing that quantity. Assume that if the firm is indifferent
between producing and shutting down, it will choose to produce. (Hint: Select purple points [diamond symbols) on the graph to receive exact average
variable cost information.)
Price
Quantity
(Dollars per jumpsuit) (Jumpsuits)
Total Revenue Fixed Cost Variable Cost
(Dollars)
(Dollars)
(Dollars)
Profit
(Dollars)
12.50
135,000
27.50
45.00
135,000
135.000
If the firm shuts down, it must incur its fixed costs (FC) in the short run. In this case, the firm's fixed cost is $135,000 per day. In other words, if it
shuts down, the firm would suffer losses of $135,000 per day until its fixed costs end (such as the expiration of a building lease).
This firm's shutdown price-that is, the price below which it is optimal for the firm to shut down-is
per jumpsuit.
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