A firm has leased plant and equipment to produce video games, which can be sold

Question

A firm has leased plant and equipment to produce video games, which can be sold in unlimited quantities at $13 each. The following figure describes the associated costs of production: Rate of output (per day) Total cost (per day) $50 $55 $62 $75 $96 $125 $162 $203 $248 Instructions: Enter your responses as a whole number. If you are entering any negative numbers be sure to include a negative sign in front of those numbers. a. How much are fixed costs? b. What is the profit-maximizing rate of output? units c. Calculate profits or losses at this profit-maximizing rate of output. d. How much is lost if the firm shuts down? (Do not include a negative sign with your answer)

Explanation / Answer

a) When output is zero, there is a cost of $50 which is the fixed cost, cost that is to be borne when there is no production. Hence fixed cost is $50.

b) Price is $13 and marginal cost is $13 when output is 3 units. Hence profit maximizing output is 3 units

c) Profit = 13*3 - 75 = -36

d) It loses its fixed cost because when it shuts down it does not produce but remains in business. Hence the loss is 50.

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