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 $1,800 for the first thousand posters, $1,500 for the second thousand, and then $900 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?

     What if she prints 2,000 posters?

     What if she prints 10,000 posters?

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

     What if she prints 2,000?

     What if she prints 10,000?

  c. If the market price fell to 85 cents per poster, would there be any output level at which Karen would not shut down production immediately? Yes or No
  

Answer 1

Quantity	Fixed cost $	Variable cost $	Total cost $	AFC $	AVC $	ATC $
1000	250	1800	2050	0.250	1.800	2.050
2000	250	3300	3550	0.125	1.650	1.775
3000	250	4200	4450	0.083	1.400	1.483
4000	250	5100	5350	0.063	1.275	1.338
5000	250	6000	6250	0.050	1.200	1.250
6000	250	6900	7150	0.042	1.150	1.192
7000	250	7800	8050	0.036	1.114	1.150
8000	250	8700	8950	0.031	1.088	1.119
9000	250	9600	9850	0.028	1.067	1.094
10000	250	10500	10750	0.025	1.050	1.075
Total cost ( Fixed cost + Variable cost)
AFC= FC/Q
AVC= VC/Q
ATC= AFC + AVC
Variable cost for 2000 units is $1800 for first 1000 +
$1500 for the next 1000
Shutdown point is minimum AVC.
Minimum AVC is $1.050 for 10,000 units.
If price falls to 85 cents, Karen will shutdown as it is below minimum AVC of $1.050.