Question

Warner &Sons is a manufacturer of three-ring binders, operating in a perfectly competitive industry. The table below shows the firm's cost schedule.

Quantity Variable Cost Total Cost
0 0 76
1 30 106
2 50 126
3 58 134
4 64 140
5 84 160
6 114 190
7 150 226
8 190 266
9 240 316

a. Warner is selling in a perfectly competitive market at a price of $40. What is the profit maximizing or loss-minimizing output? Explain your answer.
b. Calculate the firm's profit or loss. Show computation.
c. Should the firm continue to produce in the short run? Explain.
d. Suppose the fixed cost remain at $76. If the price of three-ring binders falls to $8, what is the profit-maximizing or loss-minimizing output level?
e. Calculate the profit or loss. Should the firm continue to produce in the short run? Explain your answer. Show your computation.
f. Suppose the fixed cost remains at $76. What is the price that corresponds to the shut down point?
g. Suppose the fixed cost remains at $76. What is the price that corresponds to the break even point?

Answer 1

8 because after 8 marginal cost (50) exceeds marginal revenue (40)
8*40- 266= 54
Yes because price (40) exceeds average variable cost (190/8= 23.75).
If the price falls to 8 they should not produce any because they will not be covering their average variable cost. They will lose their fixed costs (76).They should not continue to produce in the short run.
When they produce 4 their average variable cost is minimized at 16. So this price corresponds to the shut down point.
The company's minimum break even price is at 6 units where average total cost is minimized at 31.67. So the price of 31.67 is the break even point.