Additional information:
Total Total
Number of Fixed Variable
Fish Caught Costs Costs
1,000 50,000 $25,000
2,000 50,000 $40,000
3,000 50,000 $90,000
Questions
1. What is the lowest Average Total Cost that Ted can operate his business? In other words, at what cost do we reach the bottom of the average total cost curve?
2. At a market price of $51 per fish, what quantity does Ted process and what is the firm’s accounting profit at this output? (remember the profit maximization rule)
3. At a market price of $45 per fish, what quantity does Ted process and what is the firm’s accounting profit at this output?
Answer:
1) the lowest average total cost is obtained when fishing and processing 2,000 fish and it is $45 per fish
2) If the market price is $51 per fish, then Ted should be producing at full capacity = 3,000 fish and will make $12,990 in profits
3) If the market price is $45 per fish, then Ted should be producing 2,000 fish, but will not be making any profit
Explanation:
lowest average total cost:
ATC (1,000 fish) = ($50,000 + $25,000) / 1,000 = $75 per fish
ATC (2,000 fish) = ($50,000 + $40,000) / 2,000 = $45 per fish
ATC (3,000 fish) = ($50,000 + $90,000) / 3,000 = $46.67 per fish
if market price = $51
profit (1,000 fish) = ($51 - $75) x 1,000 = -$24,000
profit (2,000 fish) = ($51 - $45) x 2,000 = $12,000
profit (3,000 fish) = ($51 - $46.67) x 3,000 = $12,990
if market price = $51
profit (1,000 fish) = ($45 - $75) x 1,000 = -$30,000
profit (2,000 fish) = ($45 - $45) x 2,000 = $0
profit (3,000 fish) = ($45 - $46.67) x 3,000 = -$5,010
