5. Question : (TCO D) A software producer has fixed costs of $18,000 per month a

Question

5. Question : (TCO D) A software producer has fixed costs of $18,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below: Q TVC Price 1,000 $15,000 $25 2,000 20,000 24 3,000 30,000 23 4,000 50,000 22 5,000 80,000 20 (a.) (15 points) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work). (b.) (15 points) What should be the production level if fixed costs rose to $48,000 per month? Explain

Explanation / Answer

Total revenue would be price times quantity: those amounts, in order, would be: 25,000; 48,000; 69,000; 88,000; and 160,000

Total cost would be TVC plus total fixed cost (18,000 in the first example); 33,000; 38,000; 48,000; 68,000; and 98,000

Profit would be total revenue minus total cost: -8,000; 10,000; 21,000; 38,000; and 62,000.

Since total profit is highest at the 8,000 level of production, that would be the production level. If fixed costs increased, that would not change the optimal production level. Fixed costs have no bearing on production decisions in the short run because they are sunk costs. The table above, I didn't need to include fixed costs, comparing total revenue with total variable costs would provide the answer needed.

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