A software producer has fixed costs of $120,000 per month and her Total Variable

Question

A software producer has fixed costs of $120,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below.  Complete the table (TC, MC, TR, and MR), then answer Parts A and B.

  Q                      TVC                              Price
1,000               $115,000                             $125    
2,000                 120,000                              74    
3,000                 130,000                              55    
4,000                 150,000                              44    
5,000                 180,000                              30    

(a.) (15 points) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work.)

(b.) (15 points) What should be the production level if fixed costs rose to $160,000 per month? Explain.  

Explanation / Answer

(TCO D) A software producer has fixed costs of $18,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below:

Q TVC Price

1,000 $15,000 $25

2,000 20,000 24

3,000 30,000 23

4,000 50,000 22

5,000 80,000 20

(a.) (15 points) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work).

(b.) (15 points) What should be the production level if fixed costs rose to $48,000 per month? Explain.

answer-

(a) ANS.

Q TVC TC MC Price TR MR

1,000 $15,000 $33,000 $15 $25 $25,000 $25

2,000 20,000 $38,000 $5 24 $48,000 $23

3,000 30,000 $48,000 $10 23 $69,000 $21

4,000 50,000 $68,000 $20 22 $88,000 $19

5,000 80,000 $98,000 $30 20 $100,000 $12

So, production should be at 3,000 units for a maximum profit of $21,000. Student can calculate either using marginal analysis or calculating and comparing profits at all levels.

(b.) ANS.

Q TVC TC MC Price TR MR

1,000 $15,000 $63,000 $15 $25 $25,000 $25

2,000 20,000 $68,000 $5 24 $48,000 $23

3,000 30,000 $78,000 $10 23 $69,000 $21

4,000 50,000 $98,000 $20 22 $88,000 $19

5,000 80,000 $128,000 $30 20 $100,000 $12

Changing the fixed costs does not change MC or MR of course. Production level is exactly the same as in (a.).

So, production should be at 3,000 units for a MINIMUM LOSS of -$9,000. Students can calculate using either marginal analysis or calculating and comparing profits at all levels.

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