Question

Table 2

Number of Cinnamon Rolls	Variable Costs	TC	ATC	AVC	MC
0	0
1	2
2	3.5
3	5.5
4	8
5	11
6	15
7	21
8	29
9	39

1. Tracy’s fixed costs are still $7. Complete table 2 and graph ATC, AVC, and MC.
2. Price is $9 per cinnamon roll, draw Tracy’s profits using your graph.
3. At what price will Tracy break even?
4. At what prices will Tracy be losing profits but continue to produce?
5. At what prices will Tracy shut down?

Answer 1

Number of Cinnamon Rolls	Variable Costs	TC	ATC	AVC	MC	TR	Profit
0	0	7				0	-7
1	2	9	9.00	2.00	2.00	9	0
2	3.5	10.5	5.25	1.75	1.50	18	7.5
3	5.5	12.5	4.17	1.83	2.00	27	14.5
4	8	15	3.75	2.00	2.50	36	21
5	11	18	3.60	2.20	3.00	45	27
6	15	22	3.67	2.50	4.00	54	32
7	21	28	4.00	3.00	6.00	63	35
8	29	36	4.50	3.63	8.00	72	36
9	39	46	5.11	4.33	10.00	81	35

1.

2.

3. The firm will breakeven where P = ATC, we can find that price at P=9, Q=1, the firm breakseven

4. Tracy will be losing profit after price = 5.11 but will continue to produce as ATC is less than price

5. At a price less than AVC, the firm would shut down and which is at AVC = 1.75 as it cannot cover variable costs to run production