Question

Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $100. Her variable costs are $1,500 for the first thousand posters, $1,200 for the second thousand, and then $800 for each additional thousand posters. Instructions: Round your answers to 3 decimal places. a. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? What if she prints 2,000 posters? What if she prints 10,000 posters? b. What is her ATC per poster if she prints 1,000? What if she prints 2,000? What if she prints 10,000? c. If the market price fell to 75 cents per poster, would there be any output level at which Karen would not shut down production immediately?

Answer 1

Solution: Fixed cost $100 a) AFC TFC/Q If she prints 1,000 posters AFC for 1000 posters $100 1000 $0.100 If she prints 2,000 posters AFC for 2000 posters $100 2000 $0.050 If she prints 10,000 posters AFC for 10,000 posters $100 10,000 $0.010 b) ATC (TFC TVC)/Q If she prints 1,000 posters ATC per poster for 1000 prints-(100 + 1500) / 1000-$1.600 If she prints 2,000 posters ATC per poster for 2000 prints = (100+ 1500+ 1200) /2000 = $1.400 If she prints 10,000 posters ATC per poster for 10000 prints-(100+ 1500+ 1200+ 6400) / 10,000 = $0.9201 c) Answer: No Explanation For all levels of output AVC is greater than S0.75. So, Karen has to shut down.