5. Profit maximization and shutting down in the short runThe following graph plots daily cost curves for a firm operating in the competitive market for designer handbags.908070VATC40AVCPRICE (Dollars per bag)1003020100MC0 1020 30 40 50 60QUANTITY (Thousands of bags)70 80 90 100? Using the following table, for each price level, calculate the optimal quantity of units for the firm to produce. Using the data from the graph todetermine the firm's total variable cost, calculate the profit or loss associated with producing that quantity. Assume that if the firm is indifferentbetween producing and shutting down, it will choose to produce. (Hint: Select purple points [diamond symbols] on the graph to receive exact averagevariable cost information.)Price(Dollars per bag)25.0040.0065.00Quantity(Bags)Total Revenue(Dollars)Fixed Cost(Dollars)520,000520,000520,000Variable Cost(Dollars)Profit(Dollars)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 $520,000 per day. In other words, if itshuts down, the firm would suffer losses of $520,000 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-isper bag.

Firms operate in a competitive market based on customer demand and their cost structures. When the…

5. Profit maximization and shutting down in the short run The following graph plots daily cost curves for a firm operating in the competitive market for designer handbags. PRICE (Dollars per bag) 100 90 80 70 60 8 50 40 30 20 10 0 MC 0 10 D ATC AVC 20 30 40 50 60 70 QUANTITY (Thousands of bags) 80 90 100 ?

5. Profit maximization and shutting down in the short run The following graph plots daily cost curves for a firm operating in the competitive market for designer handbags. PRICE (Dollars per bag) 100 90 80 70 60 8 50 40 30 20 10 0 MC 0 10 D ATC AVC 20 30 40 50 60 70 QUANTITY (Thousands of bags) 80 90 100 ?

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Firms In Competitive Markets

Section: Chapter Questions

Problem 7PA

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