1) A software producer has fixed costs of $20,000 per month and her Total Variab
ID: 1236425 • Letter: 1
Question
1) A software producer has fixed costs of $20,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below:Q TVC Price
2,000 $5,000 $20
4,000 7,000 15
6,000 18,000 10
8,000 33,000 5
10,000 50,000 1
(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 $70,000 per month? Explain.
Explanation / Answer
Total Revenue= (QxP)-FC-TVC At Q=2000, (2000 x 20) – 20,000 – 5000 = 15000 At Q=4000, (4000 x 15) – 20,000 – 7000 = = 33000 At Q= 6000, (6000 x 10) – 20,000 – 18000 = 22000 At Q= 8000, (8000 x 5) – 20,000 – 33000 =-13000 At Q= 10000, (2000 x 1) – 20,000 – 50000 = -60000 a) The production level to earn highest revenue is 4000 b)If the firm increases its fixed cost to $70000, the firm will choose to close down because producing at any levels will only lead to a loss.
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