May be shown as a rectangle with a height of p atc

• Homework Help
• taino474
• 27
• 91% (33) 30 out of 33 people found this document helpful

This preview shows page 10 - 13 out of 27 pages.

may be shown as a rectangle with a height of P - ATC and a base of Q. Substituting P = \$8 per hood ie, ATC = \$13 per hoodie, and Q = 24,000 hoodies per day into the equation for profit derived in the previous explanation yields: Profit (P - ATe) x Q (\$8 per hoodie - \$13 per hoodie) x 24,000 hoodies per day -\$5 per hoodie x 24,000 hoodies per day -\$120,000 per day
For each of the prices in the table below, calculate the firm's optimal quantity if it produces, and the profit or loss it makes if it produces at that quantity, using the data from the graph above to calculate its total variable cost. Assume that if the firm is indifferent between producing and shutting down, it will produce. (Note: You can mouse over the purple diamonds on the diagram above to see precise information on average variable cost.) Price Output Total Revenue Total Fixed Cost Total Variable Cost Profit
Recall that if the firm shuts down, it must incur its total fixed costs in the short run. In this case, the firm's total fixed cost IS \$162,000 per day. In other words, if it shuts down, the firm would suffer losses of \$162,000. This firm's shutdown price-that is, the price below which it is optimal for the firm to shut down-is \$6.00 " per hoodie. ExpLanation: CLose A A firm's decision on whether or not to produce in the short run depends on whether it can earn enough revenue to cover its total variable costs. This is because a firm's total fixed costs must be incurred in the short run, regardless of whether the firm produces output or not. If the firm does not produce a positive output in the short run, economists say it shuts down. In the previous question, you saw that if the firm produces when the market price is \$6 per hoodie, it suffers a \$162,000 loss. This is the same loss it would suffer if it shut down, so at that price, it is indifferent between shutting down and producing. At prices above \$6 per hoodie, therefore, the firm maximizes
• • • 