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 $100. 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?   (Click to select)NoYes.
  

Answer 1

Since fixed costs do not vary with the quantity of output produced, thus total fixed cost (TFC) = $100.

Average fixed cost, AFC = TFC/Q

a) AFC for 1000 posters = 100/1000 = 0.1$

AFC for 2000 posters = 100/2000 = 0.05$

AFC for 10,000 posters = 100/10,000 = 0.01$

b) Total cost, TC = TFC + TVC

ATC for 1000 posters = TC/Q = (100+1800)/1000 = 1.9$

ATC for 2000 posters = TC/Q = (100+ 1500)/2000 = 0.8$

ATC 10,000 posters = (100+900)/10000 = 1000/10000 = 0.1$

c) If the market price fell to 0.85 per poster, Karen would produce somewhere between 1000 and 2000 posters (till the time price=avc)