Question

Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1.00 per poster. She has fixed costs of $500.00. 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.
1.What is her AFC per poster if she prints 1,000 posters?

2. What is her AFC per poster if she prints 2,000 posters?

3. What is her AFC per poster if she prints 10,000 posters?

4. What is her ATC per poster if she prints 1,000?

5. What is her ATC per poster if she prints 2,000?

6. What is her ATC per poster if she prints 10,000?

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?

Answer 1

Answer:

1. $0.5

2. $0.25

3. $0.05

4. $2.3

5. $1.9

6. $1.1

Explanation:

AFC for 1000 posters = Fixed cost ÷ No. of posters

                                    = 500 ÷ 1000

                                    = $0.5

AFC for 2000 posters = Fixed cost ÷ No. of posters

                                     = 500 ÷ 2,000

                                     = $0.25

AFC for 10000 posters = Fixed cost ÷ No. of posters

                                      = 500 ÷ 10,000

                                      = $0.05

Total cost = Fixed cost + Total variable cost

ATC = Average Total Cost

       = (Fixed cost + total variable cost) ÷ No. of units

4. ATC per poster for 1000 prints:

= (Fixed cost + total variable cost) ÷ No. of units

= (500 + 1800) ÷ 1000

= $2.3

5. ATC per poster for 2000 prints:

= (Fixed cost + total variable cost) ÷ No. of units

= (500 + 1800 + 1500) ÷ 2000

= $1.9

6. ATC per poster for 10000 prints:

= (Fixed cost + total variable cost) ÷ No. of units

= (500 + 1,800 + 1500 + 8 × 900) ÷ 10,000

= $1.1

AVC for 10,000 units = Total variable cost ÷ No. of units

                                  = (1,800 + 1,500 + 8 × 900) ÷ 10,000

                                   = $1.05

Even at printing of 10,000 posters, average variable cost is $1.05 that is more than the price.

It means that Karen has to shut down because average variable cost is more than price.

And it is the condition of shutdown of business.