Question

Imagine Bill operates a small business that manufactures teddy bears. Assume that the market for teddy bears is perfectly competitive and the market price is $30 per teddy bear. The following table represents Bill's daily cost structure. Complete the columns: TVC, TFC, TR, Profit, MR and MC (Enter all numerical responses as whole numbers, i.e. zero decimal places)

Quantity (bears per day)	TVC	TFC	TC	TR	Profit	MR	MC
0	$	$	$30	$	$
1	$	$	$50	$	$	$	$
2	$	$	$55	$	$	$	$
3	$	$	$70	$	$	$	$
4	$	$	$90	$	$	$	$
5	$	$	$120	$	$	$	$
6	$	$	$140	$	$	$	$
7	$	$	$185	$	$	$	$

According to the marginal approach, what is Bill's profit maximising/loss minimising quantity of teddy bears per day?

At this point, should Bill operate or shut down his business? (Type: 'operate' or 'shut down')

Suppose the market price falls to $20 per teddy bear. According to the marginal approach, what is Bill's profit maximising/loss minimising quantity of teddy bears per day?

At this point, should Bill operate or shut down his business? (Type: 'operate' or 'shut down')

Suppose the market price falls to $15 per teddy bear. According to the marginal approach, what is Bill's profit maximising/loss minimising quantity of teddy bears per day?

At this point, should Bill operate or shut down his business? (Type: 'operate' or 'shut down')

Answer 1

Suppose the market price is $ 30 per teddy bear :

Quantity (bears per day)	TVC ( $)	TFC ( $)	TC ($ )	TR ($ )	Profit ($ )	MR ( $ )	MC ( $ )	AVC ( $ )
0	0	30	30	0	-30	0	0	0
1	20	30	50	30	-20	30	20	20
2	25	30	55	60	5	30	5	13
3	40	30	70	90	20	30	15	13
4	60	30	90	120	30	30	20	15
5	90	30	120	150	30	30	30	18
6	110	30	140	180	40	30	20	18
7	155	30	185	210	25	30	45	22

Bill's profit maximizing quantity is 5 , because at this level of output price is equal to marginal cost.

At this point Bill should operate because he is earning positive profit.

Suppose the market price falls to $ 20 per teddy bear :

Quantity (bears per day)	TVC ( $)	TFC ( $)	TC ($ )	TR ($ )	Profit ($ )	MR ( $ )	MC ( $ )	AVC ( $ )
0	0	30	30	0	-30	0	0	0
1	20	30	50	20	-30	30	20	20
2	25	30	55	40	-15	20	5	13
3	40	30	70	60	-10	20	15	13
4	60	30	90	80	-10	20	20	15
5	90	30	120	100	-20	20	30	18
6	110	30	140	120	-20	20	20	18
7	155	30	185	140	-45	20	45	22

Bill's loss mimimizing quantity is 4 . At this quantity ,the maximization condition , P = MC is satisfied.

Bill should operate because at this level of output , price is greater than average variable cost ( AVC ).

Here price is $ 20 and AVC is $ 15

Suppose the market price falls to $ 15 per teddy bear :

Quantity (bears per day)	TVC ( $)	TFC ( $)	TC ($ )	TR ($ )	Profit ($ )	MR ( $ )	MC ( $ )	AVC ( $ )
0	0	30	30	0	-30	0	0	0
1	20	30	50	15	-35	30	20	20
2	25	30	55	30	-25	15	5	13
3	40	30	70	45	-25	15	15	13
4	60	30	90	60	-30	15	20	15
5	90	30	120	75	-45	15	30	18
6	110	30	140	90	-50	15	20	18
7	155	30	185	105	-80	15	45	22

Bill's loss mimimizing quantity is 3 . At this quantity , the maximization condition , P = MC is satisfied.

Bill should operate because at this level of output , price is greater than average variable cost ( AVC ).

Here price is $ 15 and AVC is $ 13