Question

Suppose that you have returned from your fishing expedition with 20,000 fish. The market price is $3 per fish. Your average fixed cost was $1 and your total variable cost was $5,000. If the price jumps to $3.50 before you sell your first fish, how much extra profit, if any, do you earn

Answer 1

Answer:

The extra profit earned is $10,000

Explanation:

First, let us lay out the information given;

number of fish caught = 20,000

total variable cost = $5,000

average fixed cost = $1

total fixed cost = average fixed cost × number of fishes

= 20,000 × 1 = $20,000

Total cost = 20,000 + 5,000 = $25,000

Next let us calculate the total amount realized from sales before the price jump;

market price = $3

Total amount from sales = 3 × 20,000 = $60,000

profit made = selling price - cost price

= 60,000 - 25,000 = $35,000

Next let us calculate amount realized after the price jump;

new market price = $3.50

Total amount from new sales = 3.50 × 20,000 = $70,000

Profit = sales revenue - cost = 70,000 - 25,000 = 45,000

Finally to calculate the extra profit made, we will find the difference between  new profit after price jump and the first profit made;

extra profit = new profit - old profit

= 45,000 - 35,000 = $10,000