Question

5. Profit maximization and shutting down in the short run 

Suppose that the market for candles 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 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.) 

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 $44,000 per day. In other words, if it shuts down, the firm would suffer losses of $44,000 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 candle.

Answer 1

TR = P * Q

TC = FC + VC

Profit = TR - TC

Price	Q	TR	FC	VC	Profit
10	6000	6000 * 10 = 60000	44000	=10 * 6000 = 60000	-44000
16	8000	16 * 8000 = 128000	44000	=10.5 * 8000 = 84000	0
40	12000	40 * 12000 = 480000	44000	=16*12000 = 192000	244000

Shut down price = 10

Answer 2

$10.00 per candle.