Question

Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fire pits for patios. They are one of about two dozen firms around the world that manufacture and sell clay fire pits for retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. There is virtually no product differentiation. A clay fire pit is a clay fire pit.

Assume that the world market demand and supply curves for clay fire pots intersects at $300 per unit.

The spreadsheet below gives some of Redstone’s production cost data. A template for the spreadsheet is provided in the Course Materials.

Q

TC

TFC

TVC

0

6,000

6,000

-

100

12,000

6,000

6,000

200

15,000

6,000

9,000

300

21,000

6,000

15,000

400

33,000

6,000

27,000

500

48,000

6,000

42,000

600

65,000

6,000

59,000

700

83,000

6,000

77,000

800

102,000

6,000

96,000

900

123,000

6,000

117,000

1000

158,000

6,000

152,000

Add columns to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC). Then, add columns to show, respectively, total revenue (TR), marginal revenue (MR), total profit, average profit, and profit margin.

Place your completed spreadsheet in the Drop Box,and use it to answer questions 1-7. Your spreadsheet and calculations are worth 15 points and count as 500 words toward your word count requirement.

Your spreadsheet must include formulas showing how you arrived at the calculations. As an alternative, you may also submit a document showing your step-by-step calculations for each of the cells. You will not receive credit if you do not show your work using one of these two methods.

For Questions 2, 4, and 5, be sure to employ both of the General Rules for Implementing the Output Decision in your explanations.

A detailed explanation should be given for each question.

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1.

If Redstone wishes to maximize profit margin, how many units should it produce?   

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Answer 1

Q	TC	TFC	TVC	AFC=TFC/q	AVC= TVC/q	ATC= TC/q	MC= ▲TC/ ▲Q	TR= 300* Q	MR	TP= TR- TC	AP	profit margin
0	6000	6000	0	-	-		-	0		-6000
100	12000	6000	6000	60	60	120	60	30000	300	18000	180	60
200	15000	6000	9000	30	45	75	30	60000	300	45000	225	75
300	21000	6000	15000	20	50	70	60	90000	300	69000	230	76.66666667
400	33000	6000	27000	15	67.5	82.5	120	120000	300	87000	217.5	72.5
500	48000	6000	42000	12	84	96	150	150000	300	102000	204	68
600	65000	6000	59000	10	98.3333333	108.33333	170	180000	300	115000	191.6667	63.88888889
700	83000	6000	77000	8.5714286	110	118.57143	180	210000	300	127000	181.4286	60.47619048
800	102000	6000	96000	7.5	120	127.5	190	240000	300	138000	172.5	57.5
900	123000	6000	117000	6.6666667	130	136.66667	210	270000	300	147000	163.3333	54.44444444
1000	158000	6000	152000	6	152	158	350	300000	300	142000	142	47.33333333

AFC = total fixed cost/total output.

AVC = total variable cost/total output.

ATC = total cost/total output.

MC = change in total cost/change in output.

Total revenue = price * quantity. And given that the demand and supply intersects at $300, which implies that equilibrium price is $ 300 because the point where the demand equals the supply determines the price.

MR = change in total revenue/change in output.

Profit = total revenue - total cost.

Average profit = total profit/total output.

Profit margin = total profit/total revenue*100

If Redstone wishes to maximize profit margin then it will be on 76.66 % and output will be 300 units