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 $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters.

What is her AFC per poster (not per thousand!) if she prints 1,000 posters? a.0.25, b. 0.12 c.1 d.25

What is her AFC per poster if she prints 2,000 posters? $ a.0.125 b. 1 c.0.25 d.25

What is her ATC per poster if she prints 1,000? $ a.12.5 b. 1.1025 c.0.25 d.1.25

What is her ATC per poster if she prints 2,000? $ a. 1 b. 12.5 c. 1.25 d. 1.025

What is the Profit (Accounting) if she prints 1000 posters $   a.-250 b. 0 c. -25 d. -50

Should she produce? a. No, shut down b. Produce c. Indifferent between producing and not

What is the Profit (Accounting) if she prints 2000 posters ? a.0 b.50 c. -50 d.1000

Should she produce? a. No, shut down b. Produce c. Indifferent between producing and not

Answer 1

1. Option a. AFC per poster for 1000 = FC/1000 = 250/1000 = 0.25
2. Option a. AFC per poster for 2000 = FC/2000 = 250/2000 = 0.125
3. Option d. ATC per poster for 1000 = TC/1000 = 1250/1000 = 1.25
4. Option d. ATC per poster for 2000 = TC/2000 = (1000+800+250)/2000 = 1.025
5. Option a. Profit for 1000 posters = TR-TC = 1*1000-1250 = -250
6. Option c. As AVC = Price =1, which covers the variable cost, Karen is indifferent on whether to produce or not
7. Option c. Profit for 2000 posters = TR-TC = 1*2000-2050 = -50
8. Option b. As the selling price of $1, covers AVC= (1800/2000) = 0.9