5. Profit maximization and shutting down in the short run Suppose that the market for frying pans is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. g 8 PRICE (Dollars per pan) 29R R2 Price (Dollars per pan) 25.00 70.00 100.00 ATC AVC 10 16 2025 QUANTITY (Thousands of paris) Quantity (Pans) 45 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 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 graph to see precise information on average variable cost.) Total Revenue Fixed Cost (Dollars) (Dollars) 1,600,000 Ⓡ 1,600,000 1,600,000 Variable Cost (Dollars) Profit (Dollars) 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 $1,600,000 per day. In other words, if it shuts down, the firm would suffer losses of $1,600,000 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 pan.
5. Profit maximization and shutting down in the short run Suppose that the market for frying pans is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. g 8 PRICE (Dollars per pan) 29R R2 Price (Dollars per pan) 25.00 70.00 100.00 ATC AVC 10 16 2025 QUANTITY (Thousands of paris) Quantity (Pans) 45 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 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 graph to see precise information on average variable cost.) Total Revenue Fixed Cost (Dollars) (Dollars) 1,600,000 Ⓡ 1,600,000 1,600,000 Variable Cost (Dollars) Profit (Dollars) 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 $1,600,000 per day. In other words, if it shuts down, the firm would suffer losses of $1,600,000 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 pan.
Chapter11: Profit Maximization
Section: Chapter Questions
Problem 11.1P
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Transcribed Image Text:5. Profit maximization and shutting down in the short run
Suppose that the market for frying pans is a competitive market. The following graph shows the daily cost curves of a firm operating in this market.
100
8
2
8
PRICE (Dollars per pan)
2
30
R 2
Price
(Dollars per pan)
25.00
70.00
100.00
ATC
AVC
10 18 20 25 30 35 40
QUANTITY (Thousands of pans)
Quantity
(Pans)
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 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 graph to see precise information on average variable cost.)
45
Total Revenue Fixed Cost
(Dollars) (Dollars)
1,600,000
1,600,000
1,600,000
Variable Cost
(Dollars)
Profit
(Dollars)
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 $1,600,000 per day. In other words, if it
shuts down, the firm would suffer losses of $1,600,000 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 pan.
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