Question

 5. Protit maximization and shutting down in the short run

 Suppose that the market for sports watches is a competitive market. The following graph shows the daily cost curves of a firm operating in this market.

 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.)

 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 $520,000 per day. In other words, if it shuts down, the firm would suffer losses of $520,000 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 watch.

Answer 1

Price	Quantity	TR	FC	VC	Profit
25	30000	750000	520000	30000x25=750000	-520000
40	40000	1600000	520000	40000x27=1080000	0
65	50000	3250000	520000	50000x32=1600000	1130000

The firm will set Price =MC to find the profit-maximizing quantity.

So, quantity can be found out be setting P=MC in the graph above

At P=25, Q=30000 given by the MC curve.

TR=PxQ

VC=AVCxQ where AVC is given by the AVC curve in the graph

Find AVC for each quantity produced by the given diamond symbol in the graph. As i don't have the graph available so my values would be approximated based on the graph.

Profit = TR-TC where TC=FC+VC

The firm's shutdown price is where P=AVC=$25