Question

KLM, Inc. is operating in a competitive market, and faces costs of production as follows:

Q	FC	VC	TC	AFC	AVC	ATC	MC	TR	MR
0		0	300
6		300
12		420
18		540
24		840
30		1200
36		2160

a.     Calculate the company’s total costs, average fixed costs, average variable costs, average total costs, marginal costs, total revenue, and marginal revenue at each level of production.

b.     The price per unit is $160, the General Manager decides to shut down. Is it a wise decision

c.     Vaguely remembering his introductory economics course, the Financial Manager tells the GM it is better to produce 36. Was the financial manager correct?

Select one:

a. None of the answers

b. a.

Q	FC	VC	TC	AFC	AVC	ATC	MC	TR	MR
0	300	0	300					0.00
6	300	300	600	50.00	50.00	100.00	50	960	160
12	300	420	720	25.00	35.00	60.00	20	1920	160
18	300	540	840	16.67	30.00	46.67	20	2880	160
24	300	840	1140	12.50	35.00	47.50	50	3840	160
30	300	1200	1500	10.00	40.00	50.00	60	4800	160
36	300	2160	2460.00	8.33	60.00	68.33	160	5760	160

bb. No
cc. Yesc.

Q	FC	VC	TC	ATC	AVC	AFC	MR	TR	MC
0	300	0	300					0.00
6	300	300	600	50.00	50.00	100.00	50	960	160
12	300	420	720	25.00	35.00	60.00	20	1920	160
18	300	540	840	16.67	30.00	46.67	20	2880	160
24	300	840	1140	12.50	35.00	47.50	50	3840	160
30	300	1200	1500	10.00	40.00	50.00	60	4800	160
36	300	2160	2460.00	8.33	60.00	68.33	160	5760	160

b.Yes
c. Nod.

Q	FC	VC	TC	ATC	AVC	AFC	MR	TR	MC
0	3000	0	300					0.00
6	3000	300	6000	500	50.00	100.00	50	960	160
12	3000	420	7200	250	35.00	60.00	20	1920	160
18	3000	540	8400	1660	30.00	46.67	20	2880	160
24	3000	840	11400	1250	35.00	47.50	50	3840	160
30	3000	1200	15000	1000	40.00	50.00	60	4800	160
36	3000	2160	24600	833	60.00	68.33	160	5760	160

b. No
c.Yese.

Q	FC	VC	TC	AFC	AVC	ATC	MC	TR	MR
0	300	0	300					0.00
6	300	300	600	50.00	50.00	100.00	50	960	160
12	300	420	720	25.00	35.00	60.00	20	1920	160
18	300	540	840	16.67	30.00	46.67	20	2880	160
24	300	840	1140	12.50	35.00	47.50	50	3840	160
30	300	1200	1500	10.00	40.00	50.00	60	4800	160
36	300	2160	2460.00	8.33	60.00	68.33	160	5760	160

b. Yes
a. Nof.

Q	FC	VC	TC	AFC	AVC	ATC	MC	TR	MR
0.00	2100.00	0.00	2100.00	na	na	na		0.00	na
42.00	2100.00	2100.00	4200.00	50.00	50.00	100.00	50.00	6720.00	160.00
84.00	2100.00	2940.00	5040.00	25.00	35.00	60.00	20.00	13440.00	160.00
126.00	2100.00	3780.00	5880.00	16.67	30.00	46.67	20.00	20160.00	160.00
168.00	2100.00	5880.00	7980.00	12.50	35.00	47.50	50.00	26880.00	160.00
210.00	2100.00	8400.00	10500.00	10.00	40.00	50.00	60.00	33600.00	160.00
252.00	2100.00	15120.00	17220.00	8.33	60.00	68.33	160.00	40320.00	160.00

b. Yes
c. No

Answer 1

b. In this case Price Per Unit is $160 and it is greater than AVC. So firm should not shut down. Rather it should continue its operations.

The shut down price is the minimum price a business needs to justify remaining in the market in the short run

A business needs to make at least normal profit in the long run to justify remaining in an industry but in the short run a firm will continue to produce as long as total revenue covers total variable costs or price per unit > or equal to average variable cost (AR = AVC). This is called the short-run shutdown price

c) The profit Maximizing Output is where MR = MC. In this case at 36 units MR = MC = 160. So this is the profit maximizing output. Yes Finance Manager is correct.