ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Consider the competitive market for dress shirts. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.
For each price in the following table, use the graph to determine the number of shirts this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero shirts and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss , or break even at each price.
Transcribed Image Text:### Homework (Ch 14)
Consider the competitive market for dress shirts. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.
#### Graph Explanation:
- The x-axis represents the **Quantity (Thousands of shirts)** produced, ranging from 0 to 100.
- The y-axis represents the **Costs (Dollars)** associated with production, ranging from 0 to 100.
Three curves are displayed on the graph:
1. **MC (Marginal Cost)**: Illustrated by the orange curve, which initially decreases and then increases, resembling a 'U' shape.
2. **ATC (Average Total Cost)**: Depicted by the green curve, which is generally 'U' shaped but positioned higher than the AVC curve. It also intersects the MC curve at its minimum point.
3. **AVC (Average Variable Cost)**: Shown by the purple curve, also 'U' shaped but lower than the ATC curve. It intersects the MC curve at its minimum point as well.
The points where the MC curve intersects both the ATC and AVC curves represent the cost-output correspondence for the production of dress shirts at the most efficient level.
Transcribed Image Text:### Maximizing Profit Analysis Table
#### Instructions:
For each price in the following table, use the graph to determine the number of shirts this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero shirts and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price.
| Price (Dollars per shirt) | Quantity (Shirts) | Produce or Shut Down? | Profit or Loss? |
|----------------------------|--------------------|-----------------------|-----------------|
| 15 | | | |
| 20 | | | |
| 25 | | | |
| 55 | | | |
| 70 | | | |
| 85 | | | |
#### How to Interpret the Graph:
1. **Price (Dollars per shirt)**: The price at which the shirts are sold.
2. **Quantity (Shirts)**: The number of shirts produced by the firm at the given price.
3. **Produce or Shut Down?**: Determines if the firm should continue producing shirts or cease production.
- **Produce**: The firm should continue producing shirts.
- **Shut Down**: The firm should cease production as it would be more cost-effective.
- **Indifferent**: The firm is indifferent between producing and shutting down, typically when the price equals the average variable cost.
4. **Profit or Loss?**: Indicates if the firm will make a profit, suffer a loss, or break even.
- **Profit**: Revenues exceed the costs.
- **Loss**: Costs exceed the revenues.
- **Break Even**: Revenues are equal to costs.
#### Additional Notes:
- When the price is below the average variable cost, the firm should shut down as it would not cover the variable costs.
- If the price is above the average total cost, the firm will make a profit.
- If the price is equal to the average total cost, the firm will break even.
- Detailed graph analysis is necessary to fill in the quantities and make decisions regarding production and profitability at each given price point
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