5. A software producer has fixed costs of $18,000 per month and her Total Variab

Question

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

Explanation / Answer

The answer to both questions: production level should be 8,000 Normally, you would solve such a problem by equating marginal cost with marginal revenue. However, with only 5 choices for production level, that metod does not work here. It is fairly easy, though, to add some columns to your table for: total revenue, total cost, and profit. You would want to pick the answer that has the largest profit amount. Total revenue would be price times quantity: those amounts, in order, would be: 25,000; 48,000; 69,000; 88,000; and 160,000 Total cost would be TVC plus total fixed cost (18,000 in the first example); 33,000; 38,000; 48,000; 68,000; and 98,000 Profit would be total revenue minus total cost: -8,000; 10,000; 21,000; 38,000; and 62,000. Since total profit is highest at the 8,000 level of production, that would be the production level. If fixed costs increased, that would not change the optimal production level. Fixed costs have no bearing on production decisions in the short run because they are sunk costs. The table above, I didn't need to include fixed costs, comparing total revenue with total variable costs would provide the answer you need. I only included it so that the total you are looking at, profit, would have a meaningful name.

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