*PLEASE ANSWER PART (VII)* You own a small factory where you make T-shirts for s
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Question
*PLEASE ANSWER PART (VII)*
You own a small factory where you make T-shirts for sale. You rent a building for $30,000 per month and rent a machine for $20,000 a month. Those are your fixed costs. Your total variable cost is given in the table below. The T-shirt industry is a perfectly competitive and anyone who enters will face the same costs of production as yours’.
Quantity of T-shirts
TVC
AVC
ATC
MC
0
$0
-
-
-
1,000
5,000
5
55
5
2,000
8,000
4
29
3
3,000
9,000
3
20
1
4,000
14,000
3.5
16
5
5,000
20,000
4
14
6
6,000
33,000
5.5
14
13
7,000
49,000
7
14
16
8,000
72,000
9
15
23
9,000
99,000
11
17
27
10,000
150,000
15
20
51
a. Use the information (data) in the table above to answer the following questions. (Note: Solutions given based on any information other than what is contained in the table will not be accepted, even if correct).
(i) If the current market price for a T-shirt is $23 per unit, how many units of T-shirts should your produce in order to maximize profit in the short run?
8,000 since at this quantity, MR=MC
Quantity of T-shirts
TVC
AVC
Fixed Cost
TC=TFC+TVC
ATC
MC
Price
TR=PxQ
Profit=
TR-TC
MR
0
$0
-
50000
50,000
-
-
23
0
(50,000)
-
1,000
5,000
5
50000
55,000
55
5
23
23,000
(32,000)
23
2,000
8,000
4
50000
58,000
29
3
23
46,000
(12,000)
23
3,000
9,000
3
50000
59,000
20
1
23
69,000
10,000
23
4,000
14,000
3.5
50000
64,000
16
5
23
92,000
28,000
23
5,000
20,000
4
50000
70,000
14
6
23
115,000
45,000
23
6,000
33,000
5.5
50000
83,000
14
13
23
138,000
55,000
23
7,000
49,000
7
50000
99,000
14
16
23
161,000
62,000
23
8,000
72,000
9
50000
122,000
15
23
23
184,000
62,000
23
9,000
99,000
11
50000
149,000
17
27
23
207,000
58,000
23
10,000
150,000
15
50000
200,000
20
51
23
230,000
30,000
23
(ii) Given your answer for part (i), what will your total profit (loss) be?
$62,000
(iii) Will decide to stay in the industry or exit in the long run?
In the long run, firms will stay in the industry.
(iv) Suppose instead that the market price of T-shirt is $6 per unit, what is the profit maximizing quantity of T-shirts that you should produce?
Quantity of T-shirts
TC=TFC+TVC
MC
Price
TR=PxQ
Profit=TR-TC
MR
0
50,000
-
6
0
(50,000)
6
1,000
55,000
5
6
6,000
(49,000)
6
2,000
58,000
3
6
12,000
(46,000)
6
3,000
59,000
1
6
18,000
(41,000)
6
4,000
64,000
5
6
24,000
(40,000)
6
5,000
70,000
6
6
30,000
(40,000)
6
6,000
83,000
13
6
36,000
(47,000)
6
7,000
99,000
16
6
42,000
(57,000)
6
8,000
122,000
23
6
48,000
(74,000)
6
9,000
149,000
27
6
54,000
(95,000)
6
10,000
200,000
51
6
60,000
(140,000)
6
5,000 since at this quantity, MR=MC
(v) Given your answer for part (iv), what will your total profit be?
$40,000
(vi) Will you decide to stay in the industry or exit in the long run?
Stay, because if we exit, the loss will be higher.
(vii) What is your break-even price? What is your shut down price (over what range of prices)?
Quantity of T-shirts
TVC
AVC
ATC
MC
0
$0
-
-
-
1,000
5,000
5
55
5
2,000
8,000
4
29
3
3,000
9,000
3
20
1
4,000
14,000
3.5
16
5
5,000
20,000
4
14
6
6,000
33,000
5.5
14
13
7,000
49,000
7
14
16
8,000
72,000
9
15
23
9,000
99,000
11
17
27
10,000
150,000
15
20
51
Explanation / Answer
For your Part 3, The answer is that the firm will stay in the industry stay in the industry as the price is above the AVC (Shut down point in short run) as well as ATC(Shut down point in long run).
Quantity of T-shirts AVC TC=TFC+TVC MC Price TR=PxQ Profit=TR-TC MR ATC 0 - 50,000 - 6 0 -50,000 6 1,000 5.0 55,000 5 6 6,000 -49,000 6 55.0 2,000 4.0 58,000 3 6 12,000 -46,000 6 29.0 3,000 3.0 59,000 1 6 18,000 -41,000 6 19.7 4,000 3.5 64,000 5 6 24,000 -40,000 6 16.0 5,000 4.0 70,000 6 6 30,000 -40,000 6 14.0 6,000 5.5 83,000 13 6 36,000 -47,000 6 13.8 7,000 7.0 99,000 16 6 42,000 -57,000 6 14.1 8,000 9.0 122,000 23 6 48,000 -74,000 6 15.3 9,000 11.0 149,000 27 6 54,000 -95,000 6 16.6 10,000 15.0 200,000 51 6 60,000 -140,000 6 20.0 The break even occurs at the point where Price P or AR equals ATC. The firm is running into losses and at all points the price or average revenue is over the average total costs curve. The firm does not break even. Shut down point is min AVC, which is 3. SO the firm will not shut down in the short run(P=6 and min AVC = 3). But will shut down in the long run as the price is less than min ATC((P=6 and min ATC = 13.8).Related Questions
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