Question

1. A computer company produces affordable, easy-to-use home computer systems and has fixed costs of $250.Themarginalcostofproducingcomputersis$700 for the first computer, $250forthesecond,$300 for the third, $350forthefourth,$400 for the fifth, $450forthesixth,and$500 for the seventh.

a. Create a table that shows the company’s output, total cost, marginal cost, average cost, variable cost, and average variable cost.

b. At what price is the zero-profit point? At what price is the shutdown point?

c. If the company sells the computers for \(500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

d. If the firm sells the computers for \)300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

Short answer

a.

b. zero-profit point, the price is $\$450$for each unit of computer

The shutdown point, the price is $\$400$for each unit of a computer.

c.The profit in the graph is the area of rectangle ABCP.

d.The profit in the graph is the area of rectangle PQRS.

Step-by-step solution

Step 1a: Definition

The Profit Determinants And Cost Curves (CC)

The average cost of a business is total cost divided by output, average variable cost is total variable cost divided by output, marginal cost is the cost of producing an extra or additional unit of output, variable cost is the cost incurred by the firm on variable factors of production, fixed cost is the cost incurred by the firm whether it produces or not, and the total cost is the sum of variable and fixed costs. Except for the fixed cost, all of these CC are U-shaped. Because output varies, the CC is U-shaped. The fixed cost, on the other hand, is a straight line because it is unaffected by output. The production point is determined by the value of Price (P) where it intersects with marginal cost, and profit or loss is determined by whether this price is greater than or less than the minimum of average cost.

Step 2a: Calculation

a. The following table shows the output, fixed costs (FC), marginal costs (MC), variable costs (VC), total costs (TC),

average costs (AC), and average variable costs (AVC):

The result is shown in the first column. The FC is likewise included in the second column, and it remains constant at $250 for all levels of output. The MC is in the third column and is provided for all output levels. The VC is found in the fourth column and is calculated as the total of the MC up to the current output level. The total of the second (FC) and fourth (VC) columns yields TC, which is found in the fifth column. The sixth column's AC is determined by dividing the fifth column's (TC) by the first column's (AC) (output). The seventh column contains AVC, which is determined by dividing the fourth column (VC) by the first column (output).

Step 3b:Defination

Zero profit condition:

The zero-profit situation occurs when an industry or kind of business has an extraordinarily low cost of entry into or withdrawal from the industry, according to economic competition theory.

Step 4b: Explanation

P=MC=min AC is the zero-profit point. The minimum AC is $450, which intersects at MC=$450 at output=6 units in the table. As a result, each computer unit costs $450 at the zero-profit point.

P=MC=min AVC is the shutdown point. The minimum AVC is $400, which intersects at MC=$400 at output=5 units in the table. As a result, at the time of closure, each computer unit costs $400.

Step 5c: Given the information

If the company sells the computers for $500, is it making a profit or a loss.

Step 6c: Calculation

If the computers are sold at $\$500$each unit, then the firm earns a profit. This is because the price at $\$500$is higher than min AC of $450.

At P=MC=$500, the firm is selling 7 computers.

So, the TC of 7 computers $=\$3200.$

The total revenue (TR) from selling 7 computers = price x quantity sold $=\$500x7=\$3500.$

The profit earned by selling 7 computers = TR - TC $=\$3500-\$3200=\$300$.

This has been shown in the graph below:

The price, AC, MC, and AVC are on the y-axis, while the output is on the x-axis in the graph above. The TR is P=AR x output, which is the area of rectangle ODCP because the corporation is selling at P=$500. The TC is the area of the rectangle ODBA since it is AC x output.

the profit $=TR-TC=$area of rectangle ODCP - the area of a rectangle $ODBA=areaofrec\tan gleABCP.$

The profit in the graph is the area of rectangle ABCP.

Step 7d: Given information

If the firm sells the computers for $\$300$, is it making a profit or a loss.

Step 8d: Explanation

If the computers are sold at $\$300$each unit, then the firm receives a loss. This is because the price at $\$300$is lower than the shutdown point of min AVC=$400.

At $P=MC=\$300,$the firm is selling 3 computers.

So, the TC of 3 computers$=\$1500$

The total revenue (TR) from selling 3 computers = price x quantity sold =$\$300x3=\$900.$

The loss caused by selling 3 computers = TC - TR = $1500 - $900 = $600.

This has been shown in the graph below:

The price, AC, MC, and AVC are on the y-axis, while the output is on the x-axis in the graph above. The TR is P=AR x output, which is the area of rectangle OTQP because the firm is selling at P=$300. The TC is the area of the rectangle OTRS since it is AC x output.

The loss $=TC-TR=$area of rectangle OTRS - area of rectangle OTQP = area of rectangle PQRS.

The profit in the graph is the area of rectangle $PQRS$.