Question

Use Figure 1 to answer questions 1-2. Figure 1 Dollars ATC Output 100 150 180 210 1 Which price corresponds to the breakeven point on the graph? 2. Which price corresponds to the shut-down point on the graph?

Answer 1

Answer : Figure-1)

1) At breakeven point Price = ATC occur. In given graph Price = ATC occurs at $15 price level. So, $15 is the breakeven price level.

2) At shutdown point Price = AVC occur. In given graph Price = AVC occurs at $7 price level. So, $7 is the shutdown price level.

Figure-2)

3) The firm should produce at $25 price level. Because the market price level $25 is higher than AVC.

4) The profit maximizing condition is Price = MC. Here at 210 output level Price = MC occurs. So, here the firm's profit maximizing output level is 210.

5) Per unit profit at 210 output level = Price - ATC = 25 - 17 = $8.

Total profit = Per unit profit * Output level = 8 * 210 = $1,680

Therefore, here the firm's profit is $1,680.

Figure-3)

6) The firm should produce at $13 price level. Because the market price level $13 is higher than AVC.

7) The profit maximizing condition is Price = MC. Here at 175 output level Price = MC occurs. So, here the firm's profit maximizing output level is 175.

8) As here price lower than ATC hence the firm faces loss.

Per unit loss at 175 output level = ATC - Price = 16 - 13 = $3.

Total loss = Per unit loss * Output level = 3 * 175 = $525

Therefore, here the firm's loss is $525.

Figure-4)

9) The firm should shutdown it's production at $5 price level. Because the market price level $5 is lower than AVC.

10) As here $5 price level is lower than MC hence we cannot determine the firm's profit maximizing output level. Because the profit maximizing condition is Price = MC.

11) As here we cannot determine the profit maximizing output level hence we cannot calculate the profit or loss amount. But as the price $5 is lower than AVC hence we can say that the firm faces extremely loss situation. As a result, the firm will shutdown it's production.