Question

2. Based on your answers to the UgotIt Mailbox Company question in #1, imagine a situation where firm produces a quantity of 300 that it sells at a price of $50 each.

1. What will be the company’s profits or losses?

  

2. How can you tell at a glance whether the company is making or losing money at this price by looking at average cost?

  

3. At the given quantity and price, is the marginal unit produced adding to profits?

WHERE QUESTION 1, IS AS FOLLOWS

1. The UGotIt Mailbox company has fixed costs of $8,000, and its variable costs for a range of output levels are shown below. Calculate total cost, average cost, marginal cost, and average variable cost for the different quantities of output shown. Sketch one diagram showing total cost, and another diagram that shows AC, MC, and AVC.

  

Quantity            Variable Cost

0                                  —

100                         $1,000

200                         $2,000

300                         $4,000

400                         $8,000

500                       $15,000

600                       $25,000

Answer 1

1) Profits = Total revenue- total cost

Total revenue= price*quantity

= 50*300

= 15000

Total costs = fixed cost+ variable cost when 300 units are produced

= 8000+4000

=12000

Profits= 15000-12000=3000

* We can tell whether the company is making Profits or losses at the current price by comparing the current price to the average cost. If current price exceeds average cost, then company is making Profits. If current price is less than the average cost, company is facing losses.

Here , price= 50

Average cost = 12000/300= 40

Price> average , so company is making Profits.

* At the given quantity and price, marginal unit produced is adding to the total profits. ( As the difference between price and average cost is positive.)