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6/19/22, 3:07 PM Aplia: Student Question https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentId=594370205413401683037472468&eISBN=9781337096577&id=1507053674&snap… 1/3 Points: 0.67 / 1 Close Explanation Back to Assignment Attempts 0.2 1.7 1.7 Keep the Highest 1.7 / 2 5. Profit maximization and shutting down in the short run Suppose that the market for air fresheners 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 graph to identify its total variable cost. Assume that if the firm is indifferent between producing and shutting down, it will produce. ( Hint : You can select the purple points [diamond symbols] on the graph to see precise information on average variable cost.) Price Quantity Total Revenue Fixed Cost Variable Cost Profit (Dollars per air freshener) (Air fresheners) (Dollars) (Dollars) (Dollars) (Dollars) 10.00 6,000 44,000 16.00 8,000 44,000 40.00 12,000 44,000 Explanation: The firm will choose to produce the quantity at which . At a price of $10.00 per air freshener, that quantity is 6,000 air fresheners per day; at a price of $16.00 per air freshener, that quantity is 8,000 air fresheners per day; and at a price of $40.00 per air freshener, that quantity is 12,000 air fresheners per day. 0 2 4 6 8 10 12 14 16 18 20 40 36 32 28 24 20 16 12 8 4 0 PRICE (Dollars per air freshener) QUANTITY (Thousands of air fresheners) MC ATC AVC 60,000 60,000 -44,000 128,000 84,000 0 720,000 612,000 64,000 480,000 192,000 244,000

6/19/22, 3:07 PM Aplia: Student Question https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentId=594370205413401683037472468&eISBN=9781337096577&id=1507053674&snap… 2/3 Points: 1 / 1 Close Explanation Total revenue is equal to price times quantity. Therefore, at a price of $10.00 per air freshener, you can compute total revenue in the following way: Similar calculations yield a total revenue of $128,000 and $480,000 at prices of $16.00 per air freshener and $40.00 per air freshener, respectively. In order to find variable cost, you can use the fact that average variable cost (AVC) is equal to variable cost divided by quantity produced. Selecting the purple points (diamond symbols), you can see that the AVC of producing 6,000 air fresheners is $10.00 per air freshener; the AVC of producing 8,000 air fresheners is $10.50 per air freshener; and the AVC of producing 12,000 air fresheners is $16.00 per air freshener. Therefore, the variable cost at each of these output levels is as follows: Quantity x Average Variable Cost = Variable Cost (Air fresheners) (Dollars per air freshener) (Dollars) 6,000 10.00 60,000 8,000 10.50 84,000 12,000 16.00 192,000 Profit is the difference between total revenue and total cost. Total cost is the sum of variable cost and fixed cost. Therefore, profit is also equal to the following: 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 $44,000 per day. In other words, if it shuts down, the firm would suffer losses of $44,000 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 $10.00 per air freshener. Explanation: A firm's decision on whether to produce in the short run depends on whether it can earn enough revenue to cover its variable costs. A firm's fixed costs must be incurred in the short run, regardless of whether the firm produces output. Because these costs must be paid regardless of production, they are considered sunk and should not be taken into consideration in the short run. If the firm does not produce a positive output in the short run, economists say it shuts down . In this problem, if the firm produces when the market price is $10.00 per air freshener, it suffers a $44,000 loss. This is the same loss it would suffer if it shut down, so at that price, it is indifferent between shutting down and producing. At prices above $10.00 per air freshener, the firm maximizes profit (or minimizes its losses) by producing in the short run; at prices below $10.00 per air freshener, the firm maximizes profit (or minimizes its losses) by shutting down. Therefore, $10.00 per air freshener is the firm's shutdown price.