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 $500. 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?

   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 95 cents per poster, would there be any output level at which Karen would not shut down production immediately?   

         (Click to select)  Yes  No  

Answer 1

a) AFC for 1000 posters = FC/Q = 500/1000 = 0.5

AFC for 2000 posters = 500/2000=0.25

AFC for 10000 posters = 500/10000 = 0.05

Total cost = FC+VC

b) TC=FC+VC = 500+2000(for first 1000 posters) = 2500

ATC for 1000 posters = 2500/1000 = 2.5

TC for 2000 posters = 500+2000+1600 = 4100

ATC for 2000 posters = 4100/2000 = 2.05

TC for 10000 posters = 500+2000+1600+8000 = 12100

ATC for 10000 posters = 12100/10000 = 1.21

c) She will shut down if she is unable to cover her AVC

AVC for 10000 units = VC/Q = 2000+1600+8000/10000 = 1.16

Because the AVC is greater than the price,so she will shut down.