3. Karen runs a print shop that makes posters for large compa nies. It is a very
ID: 1162454 • Letter: 3
Question
3. Karen runs a print shop that makes posters for large compa nies. It is a very competitive business. The market price is currently SI per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? 2,000? 10,000? What is her ATC per poster if she prints 1,000? 2,000? 10,000? If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down pro- duction immediately? LO10.5Explanation / Answer
1)
Quantity
AFC
1000
250/1000 = 0.25
2000
250/2000 = 0.125
10,000
250/10000 = 0.025
2)
Quantity
AFC
AVC
ATC
1000
250/1000 = 0.25
1000/1000 = 1
0.25+1 = 1.25
2000
250/2000 = 0.125
1800/2000 = 0.90
0.125+0.9 = 1.025
10,000
250/10000 = 0.025
7800/10000 = 0.78
0.025+0.78 = 0.805
?
3)
No, Karen would shut down immediately when the price per poster declines to 70 cents as the AVC is higher than this price at all levels. When the market price decreases to 0.70 per poster there would not be any output level at which Karen would not shut down production immediately. Because as we computed above the AVC per poster is 0.78 for more than 2000 poster Karen will shut down if the price declines to 0.70.
Quantity
AFC
1000
250/1000 = 0.25
2000
250/2000 = 0.125
10,000
250/10000 = 0.025
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