Consider the competitive market for dress shirts. The following graph shows the
ID: 1208683 • Letter: C
Question
Consider the competitive market for dress shirts. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry. For each price in the following table, use the graph to determine the number of shirts this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero shirts and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price.Explanation / Answer
What is a 'Shutdown Point'
A ending purpose could be a purpose of operations wherever a firm is indifferent between continued operations and move down briefly. The ending purpose is that the combination of output and value wherever a firm earns barely enough revenue to hide its total variable prices.
BREAKING DOWN 'Shutdown Point'
If a firm is working at its ending purpose, it's typically operational at a loss. The thought is that if a firm will manufacture revenue bigger or adequate its total variable prices, it will use the extra revenue to pay down its mounted prices. This assumes that mounted prices can still be incurred once a firm shuts down, like lease contracts or alternative prolonged obligations. In alternative words, once a firm will earn a positive contribution margin, it ought to stay in operations, despite AN overall loss.
So as given within the question average variable price is value. It suggests that worth is capable marginal revenue.If MR is greater than MC the firm can still work as a result of firm is in a position to require value out of its revenue. If MR is less than MC the firm can work losses as a result of it's unable to require out value out of its revenue and once ATC = MC then the firm can stop manufacturing additional as a result of at this time firm is unable to hold even its variable value.
Price
(dollars per shirt)
Quantity
(shirts
Price
(dollars per shirt)
Quantity
(shirts
Produce or Shut Down ? Profit or Loss ? 10 20 produce profit 20 30 produce maximum profit 30 35 produce loss 40 37 produce loss 50 40 shut down loss 60 42 shut down loss