Question

Ultrasonic is a profit‐maximizing electronics company that runs a small flat panel TV division. Each week, Ultrasonic sells 2,500 TVs at the equilibrium market price of $1,000 each. Weekly fixed costs at the flat panel TV division are $500,000 and the division has weekly losses for $250,000.

a. Find Ultrasonic’s weekly revenues, weekly total costs and weekly variable costs.

b. In a diagram, draw an ATC, an AVC and a MC curve consistent with the data above.

c. In the short run, should Ultrasonic keep its flat panel TV division open or should it shut it down? Why?

d. According to a recently published market analysis, flat panel TVs prices will remain in the ballpark of $1,000 for years. What should the company do with its flat panel TV division?

e. Suppose weekly fixed cost at the division were $100,000 (instead of $500,000), would your answers to part B and C be different? Briefly explain.

Answer 1

(a)

Revenue (TR) = Price x Quantity= $1,000 x 2,500 = $2,500,000

Total cost (TC) = TR + Loss = $(2,500,000 + 250,000) = $2,750,000

Variable cost (VC) = TC - FC = $(2,750,000 - 500,000) = $2,250,000

(b) The graph is as follows. A horizontal demand curve is assumed (since the firm sells at market price) for which profit is maximized (loss is minimized) when price equals MC.

ATC = TC / Q

AVC = VC / Q

(c) Since TR > VC ($2,500,000 > $2,250,000), price is higher than average variable cost and the firm can cover its variable costs with its revenue and should continue to operate in short run.

(d) If the long run is implicated, since firm will earn a loss in long run, it should shut down and exit the market.

(e) If FC = $100,000 then

VC = TC - FC = $(2,750,000 - 100,000) = $2,650,000

Since TR < VC, Price < AVC and firm cannot recover its variable cost with revenue and should shut down in short run. In the long run, it would exit the market.