Question

Bob’s Adirondack is one of approximately 85 companies worldwide producing 100% natural wood Adirondack chairs. Despite trying to differentiate their product, Bob’s has found that they can only charge the market price for their chairs.

1. a. Add columns to the spreadsheet and make the appropriate calculations for Average Fixed Cost, Average Variable Cost, Average Total Cost and Short-Run Marginal Cost.

b. Assuming the market clearing price is $160, calculate Total Revenue, Marginal Revenue, Profit and Profit Margin for Bob’s Adirondack.

c. If the CEO of Bob’s wants to minimize ATC, what quantity should they produce? What if he wants to maximize profit margin?

d. You become the CEO, after the prior executive is fired, what quantity do you recommend the firm produce? Why?

e. Now, change the total fixed costs to $20,000. How does this change the optimal quantity of chairs to produce? Explain

Q TC TFC TVC

0 $5,000 $10,000 $0

100 $14,900 $10,000 $4,900

200 $23,800 $10,000 $13,800

300 $31,700 $10,000 $21,700

400 $42,600 $10,000 $32,600

500 $54,500 $10,000 $44,500

600 $70,400 $10,000 $60,400

700 $88,300 $10,000 $78,300

800 $108,200 $10,000 $98,200

900 $130,100 $10,000 $120,100

1000 $154,000 $10,000 $144,000

Answer 1

Q	TC	TFC	TVC = TC-TFC	AFC = TFC/Q	AVC = TVC/Q	ATC = TC/Q	MC= TCi+1 - TCi	TR = P*Q	MR =TRi+1 - TRi	profit = TR - TC	Profit margin = P - MC
0	5000	10000	0					0
100	14900	10000	4900	100.00	49.00	149.00	49	16000	160	1100	111
200	23800	10000	13800	50.00	69.00	119.00	89	32000	160	8200	71
300	31700	10000	21700	33.33	72.33	105.67	79	48000	160	16300	81
400	42600	10000	32600	25.00	81.50	106.50	109	64000	160	21400	51
500	54500	10000	44500	20.00	89.00	109.00	119	80000	160	25500	41
600	70400	10000	60400	16.67	100.67	117.33	159	96000	160	25600	1
700	88300	10000	78300	14.29	111.86	126.14	179	112000	160	23700	-19
800	108200	10000	98200	12.50	122.75	135.25	199	128000	160	19800	-39
900	130100	10000	120100	11.11	133.44	144.56	219	144000	160	13900	-59
1000	154000	10000	144000	10.00	144.00	154.00	239	160000	160	6000	-79
b) P = $160
c) To minimize ATC, the firm will produce at Q = 300 where ATC iis minimum = 105.67
To maximize profit margin. It produce = 100 where profit margin defined as P - MC.
d) If I were CEO, then I would produce till a point MC<=P. This is because the firm is price taker and thus produce at P>=MC. Thus Q = 600.
e) Nothing changes because fixed cost are not considered for operation decisions.