Profit maximization and shutti
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Economics
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Question description
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.
0246810121416182050454035302520151050PRICE (Dollars per sweater)QUANTITY (Thousands of sweaters)MCATCAVC7.5, 12.5
For each price in the following table, calculate the firm's optimal quantity of units to produce, and determine the profit or loss if it produces at that quantity, using the data from the previous graph 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.)
Price | Quantity | Total Revenue | Fixed Cost | Variable Cost | Profit |
|---|---|---|---|---|---|
(Dollars per sweater) | (Sweaters) | (Dollars) | (Dollars) | (Dollars) | (Dollars) |
| 12.50 | 135,000 | ||||
| 27.50 | 135,000 | ||||
| 45.00 | 135,000 |
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—is![]()
per sweater.
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