Consider a perfectly competitive market for teddy bears. The following graph sho

Question

Consider a perfectly competitive market for teddy bears. The following graph shows the daily cost curves of a firm operating in this market. In the short run, at a market price of $8 per bear, this firm will choose to produce bears per day. On the previous graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $8 and the firm chooses to produce the quantity you already selected. Tool tip: Mouse over the shaded region on the graph to see its area. The area of this rectangle indicates that the firm would have of per day. For each price in the following table, calculate the firm's optimal quantity of units produced and determine the profit or loss if it produces at that quantity, using the data from the previous graph to identify 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 points [diamond symbols] on the previous graph to see precise information on average variable cost.) If a firm shuts down, it incurs its fixed costs (FC) in the short run. In this case, the fixed cost of the firm producing teddy bears is $162,000 per day. In other words, if it shuts down, the firm would suffer losses of $162,000 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 bear.

Explanation / Answer

24,000

loss

Loss = (ATC-P)*Q = (13-8)*24000 = 5*24 = $120,000

$6

P Q TR =PQ FC VC Profit 6 18,000 108000 162,000 108,000 -162,000 12 36000 432000 162,000 270,000 0 18 54000 972000 162,000 540000 270000

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