Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fir

Question

Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fire pits for patios. They are one of about two dozen firms around the world that manufacture and sell clay fire pits for retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. There is virtually no product differentiation; a clay fire pit is a clay fire pit.

The spreadsheet below gives some of Redstone’s production cost data. Enter this data in your own Excel spreadsheet. (Remember our discussion of Smith Farms in the Attend session!) Add columns 5, 6, 7, and 8 to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC). You will send me the spreadsheet via the Drop Box. Don’t send it yet, however, because you will need to add more columns, as explained below.

(1)    (2)    (3)   (4)

Q    TC    TFC    TVC

0    5000    5000    0

100    10000    5000    5000

200    19000    5000    14000

300    27000    5000    22000

400    38000    5000    33000

500    50000    5000    45000

600    66000    5000    61000

700    84000    5000    79000

800    104000    5000    99000

900    126000    5000    121000

1000    150000    5000    145000

The world market demand and supply curves for clay fire pots intersects at $190 per unit. Add columns 9, and 10 to show, respectively, total revenue (TR) and marginal revenue (MR). Add column 11 to show profit (i.e., TR-TC). Add column 12 to show profit per unit (i.e., average profit). Add column 13 to show profit margin (i.e., price minus average total cost).

Submit your Excel spreadsheet to the Drop Box. [Hint: At Q = 400: AVC = 82.50, SMC = 110, MR = 190, profit = 38,000, and profit margin = 95].

If Redstone wanted to minimize average total cost, it would produce how many units?

If Redstone wishes to maximize profit MARGIN, it should produce how many units.

What level of output should the manager of Redstone choose to produce? Explain briefly.

Now triple the fixed costs to 15,000 in your spreadsheet. How does this change your answer to question 3.

Suppose that Nancy Pelosi declares that clay fire pits are causing global warming, and demand for fire pits shrinks substantially in the U.S. (especially in California). Fire pit prices fall worldwide to $65. Now, the manager of Redstone should produce how many units? Explain your answer.

Explanation / Answer

NOTES TO CALCULATIONS:

1. TVC = TC - TFC

2. ATC = TC / Q

3. AFC = TFC / Q

4. AVC = TVC / Q

5. SMC is the difference between successive TC values.

6. TR = P X Q = 190 X Q

7. MR is the difference between successive TR values.

So,

(1)

the calculated table as follows.

(2)

ATC is minimized (= 90) when Q = 300

(3)

Profit Margin is highest (= 100) when Q = 300

(4)

Output should be produced to maximize total profits. This is at Q = 700 (Profit = 49,000)

(5)

If FC = 15,000, revised calculated table is as follow.

So, profit margin is highest (= 100) when Q = 300. The answer does not change.

NOTE: There are many calculations & questions, out of which the first 5 have been answered with detailed computations.

Q TC TFC TVC AFC AVC ATC SMC TR MR PROFIT AVERAGE PROFIT PROFIT MARGIN 0 5,000 5,000 0 0 -5,000 100 10,000 5,000 5,000 50.0 50.0 100 5,000 19,000 19,000 9,000 90 90 200 19,000 5,000 14,000 25.0 70.0 95 9,000 38,000 19,000 19,000 95 95 300 27,000 5,000 22,000 16.7 73.3 90 8,000 57,000 19,000 30,000 100 100 400 38,000 5,000 33,000 12.5 82.5 95 11,000 76,000 19,000 38,000 95 95 500 50,000 5,000 45,000 10.0 90.0 100 12,000 95,000 19,000 45,000 90 90 600 66,000 5,000 61,000 8.3 101.7 110 16,000 1,14,000 19,000 48,000 80 80 700 84,000 5,000 79,000 7.1 112.9 120 18,000 1,33,000 19,000 49,000 70 70 800 1,04,000 5,000 99,000 6.3 123.8 130 20,000 1,52,000 19,000 48,000 60 60 900 1,26,000 5,000 1,21,000 5.6 134.4 140 22,000 1,71,000 19,000 45,000 50 50 1000 1,50,000 5,000 1,45,000 5.0 145.0 150 24,000 1,90,000 19,000 40,000 40 40

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