30 POINTS) Bob’s costs of DVD production are shown in the table below. Assume th
ID: 1224145 • Letter: 3
Question
30 POINTS) Bob’s costs of DVD production are shown in the table below. Assume that DVD production is a perfectly competitive industry. There is free entry into the industry, and anyone who enters will face the same costs as Bob. Use the numbers in the table below to answer the following questions. NOTE: I am looking fornumerical answers.
Quantity of DVDs(Q)
VC
($)
FC
($)
TC
($)
AVC
($)
ATC
($)
MC
($)
0
0
50,000
50,000
-
-
-
1,000
5,000
50,000
55,000
5.00
55.00
5.00
2,000
8,000
50,000
58,000
4.00
29.00
3.00
3,000
9,000
50,000
59,000
3.00
19.67
1.00
4,000
14,000
50,000
64,000
3.50
16.00
5.00
5,000
20,000
50,000
70,000
4.00
14.00
6.00
6,000
33,000
50,000
83,000
5.50
13.83
13.00
7,000
49,000
50,000
99,000
7.00
14.14
16.00
8,000
72,000
50,000
122,000
9.00
15.25
23.00
9,000
99,000
50,000
149,000
11.00
16.56
27.00
10,000
150,000
50,000
200,000
15.00
20.00
51.00
(3 POINTS) What is Bob’s shutdown price? Explain your answer.
(3 POINTS) What is Bob’s breakeven price? Explain your answer.
(6 POINTS) If the market price of a DVD is $1, how many DVDs will Bob produce?Explain your answer.
(10 POINTS) If the market price of a DVD is $6, how many DVDs will Bob produce? At this output level, what is his total revenue? Show your work. At this output level, Bob makes a loss. What is the amount of the loss? Show your work. Why does Bob produce in the short run despite making a loss? Explain your answer.
(8 POINTS) If the market price of a DVD is $16, how many DVDs will Bob produce? At this output level, what is his profit? Show your work for full credit..
Quantity of DVDs(Q)
VC
($)
FC
($)
TC
($)
AVC
($)
ATC
($)
MC
($)
0
0
50,000
50,000
-
-
-
1,000
5,000
50,000
55,000
5.00
55.00
5.00
2,000
8,000
50,000
58,000
4.00
29.00
3.00
3,000
9,000
50,000
59,000
3.00
19.67
1.00
4,000
14,000
50,000
64,000
3.50
16.00
5.00
5,000
20,000
50,000
70,000
4.00
14.00
6.00
6,000
33,000
50,000
83,000
5.50
13.83
13.00
7,000
49,000
50,000
99,000
7.00
14.14
16.00
8,000
72,000
50,000
122,000
9.00
15.25
23.00
9,000
99,000
50,000
149,000
11.00
16.56
27.00
10,000
150,000
50,000
200,000
15.00
20.00
51.00
Explanation / Answer
Total Revenues = $6 (price) * 6000 (unit) = $36000
Total Cost = $83000 (as given in the table)
Total Loss = $36000 - $83000 = -$47000
The firm will continue to run its operations even when a firm is making loss because at this price ($6) the firm’s Unit Contribution Margin is ($0.5). So, when the firm will reach an output of 100,000 unit (Calculated below), it will neither making a loss nor profit. However, for every extra unit of output (i.e. more than 100,000), the firm will start making profit. So it is feasible for a firm to stay in business even though it is making loss at the initial stage.
Break-even point in unit can be calculated as = 50000 (Fixed Cost)/ ($6 (Price) - $5.5(AVC))
5. If the market price of a DVD is $16, Bob will produce 10,000 units of DVD because at this level of output the total average variable cost would incurred is $15 and a firm can go on producing the DVDs until it reaches the break-even point of 50,000 unit.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.