Question

Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $2,000 for the first thousand posters, $1,600 for the second thousand, and then $1,000 for each additional thousand posters. Instructions: Round your answers to 3 decimal places.

a. What is her AFC per poster (not per thousand!) if she prints 1,000 posters?

2,000?

10,000?

b. What is her ATC per poster if she prints 1,000?

2,000?

10,000?

c. If the market price fell to 95 cents per poster, would there be any output level at which Karen would not shut down production immediately? (Yes/ No)

Answer 1

(a) Average Fixed Cost if she prints 1,000 posters = Fixed Cost / Quantity of output produced

=  $250 / 1,000

= $ 0.25

Average Fixed Cost if she prints 2,000 posters = Fixed Cost / Quantity of output produced

= $250 / 2,000

= $ 0.125

Average Fixed Cost if she prints 10,000 posters = Fixed Cost / Quantity of output produced

= $250 / 10,000

= $ 0.025

(b) Average Total Cost per poster if she prints 1,000 posters = Variable Cost / Quantity of output produced + Fixed Cost / Quantity of output produced

= Average Variable Cost + Average Fixed Cost

= $2,000 / 1,000 + $250 / 1,000

= 2 + 0.25 = $ 2.25

Average Total Cost per poster if she prints 2,000 posters = Average Variable Cost + Average Fixed Cost

  = $3,600 / 2,000 + $250 / 2,000

= 1.8 + 0.125 = $ 1.925

Here, Average Variable Cost = $2,000 for the first thousand posters + $1,600 for the second thousand = $3600

Average Total Cost per poster if she prints 10,000 posters = Average Variable Cost + Average Fixed Cost

= $11,600/ 10,000 + $250 / 10,000

= 1.16 + 0.025 = $ 1.185

Here, Average Variable Cost = $2,000 for the first thousand posters + $1,600 for the second thousand + $1,000 for each additional thousand posters

= $2,000 + $1,600 + 1,000 * 8 = $11,600

(c) If the market price fell to 95 cents per poster, yes there would be a output level at which Karen would not shut down production immediately. The shut-down point is where the average variable cost equals the marginal cost, so as long as the average variable cost does not equal the marginal cost, Karen will continue printing posters for large companies.