Question

Donny;s Burgers is a price taker. Its costs are

Output (Plates per day)	Total Cost
0	0
1	28
2	38
3	51
4	70
5	91
6	130

A) What is Donny's shut-down point?

B) What is the profit maximizing quantity and economic profit if the price is $21 a dish?

C) We are assuming that the above total cost is the total variable cost. Now, suppose that we introduce a fixed cost equal to 10. Redo Question 22 to compute the price at which the firm will break even.

Answer 1

Output	Total Cost
0	0
1	28
2	38
3	51
4	70
5	91
6	130

a) Shut down point occurs when average variable cost curve = marginal cost

Output	Total Cost	Average Variable Cost	Marginal Cost
0	0	-	-
1	28	28.00	28
2	38	19.00	10
3	51	17.00	13
4	70	17.50	19
5	91	18.20	21
6	130	21.67	39

It would occur when output level is more than 3 and less than 4. Thus 3 units would be produced.

b) Price = $21

Total Revenue = Price * Quantity Purchased

Output	Price	Total Cost	Average Variable Cost	Marginal Cost	Total Revenue	Marginal Revenue	Profit
0	10	0	-	-	0	-	0
1	10	28	28.00	28	10	10	-18
2	10	38	19.00	10	20	10	-18
3	10	51	17.00	13	30	10	-21
4	10	70	17.50	19	40	10	-30
5	10	91	18.20	21	50	10	-41
6	10	130	21.67	39	60	10	-70

Profit maximizing output level occurs when MR = MC or they are closest. It occurs when output level of 2 is produced. At output level of 2, there is profit of -18 which is minimum loss.

c)

Output	Price	Variable Cost	Fixed Cost	Total Cost	Average Variable Cost	Marginal Cost	Total Revenue	Marginal Revenue	Profit
0	10	0	10	10	-	-	0	-	-10
1	10	28	10	38	38.00	28	10	10	-28
2	10	38	10	48	24.00	10	20	10	-28
3	10	51	10	61	20.33	13	30	10	-31
4	10	70	10	80	20.00	19	40	10	-40
5	10	91	10	101	20.20	21	50	10	-51
6	10	130	10	140	23.33	39	60	10	-80

Shut down point occurs when average variable cost curve = marginal cost. It occurs between 5 - 6 units of quantity produced. Producer will shut down at 5 units.

Profit is maximum when MR = MC and MC is rising which occurs at output level when is 2. Loss at that level is -28 (minimum).