Question

3. Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? 2,000? 10,000? What is her ATC per poster if she prints 1,000? 2,000? 10,000? If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately? LO10.5

Answer 1

Fixed cost = $250

Price = $1

Total cost = Fixed cost + Variable cost

Variable cost for first 1,000 units = $1,000

Variable cost for second 1,000 units = $800

Variable cost for third 1,000 units = $750

Total cost for first 1,000 units = $250 + $1,000 = $1,250

Total cost for first 2,000 units = $250 + $800 = $1,050

Total cost for first 10,000 units = $250 + $750 = $1,000

AFC is calculated as (Fixed Cost / Output). AFC for:

1,000 units = ($250 / 1,000) = $0.25

2,000 units = ($250 / 2,000) = $0.125

10,000 units = ($250 / 10,000) = $0.025

AVC is calculated as (Variable Cost / Output). AVC for:

1,000 units = ($1,000 / 1,000) = $1

2,000 units = ($800 / 2,000) = $0.4

10,000 units = ($750 / 10,000) = $0.075

ATC is calculated as (Total Cost / Output). ATC for:

1,000 units = ($1,250 / 1,000) = $1.25

2,000 units = ($1,050 / 2,000) = $0.525

10,000 units = ($1,000 / 10,000) = $0.1

If market price fell to $0.7

Firm shut down when price < average variable cost. Thus, firm will shut down at output level of 1,000 and do not shut down when output rises to 2,000 and more.