5. Profit maximization and shutting down in the short run Suppose that the marke

Question

5. Profit maximization and shutting down in the short run Suppose that the market for black sweaters is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. QUANTITY (Thounands of swuars For each price in the following table, calculate the firm's optimai quantity of units to produce, and determine the profit or loss if it produces to identify its total variable cost. Assume that if the firm is indifferent between producing and shutting down, it will produce. (Hint: You can select the purple points [diamond symbols] on the previous graph to see precise information on average variable cost.) at that quantity, using the data from the previous graph Fixed Quantity Total Revenue CostVariable Cost Profit (Dollars) Price (Dollars (Sweaters) (Dollars) (Dollars) (Dollars) per sweater 12.50 27.50 135,000 135,000 135,000 45.00 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 per sweater

Explanation / Answer

Quantity produced would be such that P = MC

VC = AVC x Q

TR = P x Q

Profit = TR - FC - VC

This firm's shutdhown price - that is, the price below which it is optimal for the firm to shut down is $12.5 per sweater. (P = min AVC)

Price ($) Q TR ($) FC ($) VC ($) Profit ($) 12.5 7500 93750 135000 93750 -135000 27.5 10000 275000 135000 140000 0 45 12000 540000 135000 210000 195000

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