Profit maximization and shutti

timer Asked: Nov 6th, 2015

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.)



Total Revenue

Fixed Cost

Variable Cost


(Dollars per sweater)






12.502,000 135,000
27.5010,000 135,000
45.0012,000 135,000

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.

Tutor Answer

(Top Tutor) Studypool Tutor
School: Boston College
Studypool has helped 1,244,100 students
flag Report DMCA
Similar Questions
Hot Questions
Related Tags
Study Guides

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors