Suppose that the market for polos is a competitive market. The following graph s

Question

Suppose that the market for polos is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. For each price in the following table, calculate the firm's optimal quantity of units to produce, and determine the profit or loss if it produces at that quantity, using the data from the previous graph to identify its total variable cost. Assume that if the firm is indifferent between producing and shutting down, it will produce. If the firm shuts down, it must incur its fixed costs (FC) in the short run. In this case, the firm's fixed cost is dollar 135,000 per day. In other words, if it shuts down, the firm would suffer losses of dollar 135,000 per day until its fixed costs end (such as the expiration of a building lease). This firm's shutdown price-that is, the price below which it is optimal for the firm to shut down-is________ per polo.

Explanation / Answer

Total Revenue = P*Q

Variable Cost = AVC*Q

Profit = Total Revenue - Fixed Cost - Variable Cost

Price Quantity Total Revenue Fixed cost Variable Cost Profit

12.5 7,000 87,500 135,000 87,500 -1,35,000

27.5 10,000 275,000 135,000 140,000 0

45 12,000 540,000 135,000 210,000 195,000

Shut Down Price is $12.5

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