E202Solutions4.5

E202Solutions4.5 - 10. What is the profit-maximizing level...

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9. What is the profit-maximizing level of output and how much daily profit will the producer below earn if the price of pizza is $0.50/slice? Answer : Because price is less than the minimum value of AVC, this producer will shut down in the short run: produce quantity zero. Daily profits are a loss equal to fixed cost. Fixed cost is the difference between total cost and total variable cost. TC = Q x ATC = (260 slices/day) ($1.18/slice) = $306.80/day and VC = Q x AVC = (260 slices/day) ($0.68/slice) = $176.80/day. So fixed cost = $306.80/day - $176.80/day = $130/day. This producer’s profit is thus -$130/day.
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Unformatted text preview: 10. What is the profit-maximizing level of output and how much daily profit will the producer below (who is the same producer as in #9) earn if the price of pizza is $1.18/slice? Answer : This producer will sell 435 slices per day, the quantity for which P = MC. Total revenue will therefore be P x Q = ($1.18/slice) x (435 slices/day) = $513.30/day. Variable cost is AVC x Q = ($0.77/slice) (435 slices/day) = $334.95/day. Add fixed cost of $130/day to variable cost to obtain total cost = $464.95/day. So daily profit is TR - TC = $513.30/day -$464.95/day = $48.35/day....
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This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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