Answer:
Q Fixed Variable Total Marginal Aver. Aver. Aver.
Costs Costs Cost Cost FC VC TC
0 100 0 100 - - - -
1 100 50 150 150 100 50 150
2 100 70 170 20 50 35 85
3 100 90 190 20 33.33 30 63.33
4 100 140 240 50 25 35 60
5 100 200 300 60 20 40 60
6 100 360 460 160 16.67 60 76.67
The firm's profit in this case is -$360.
True or False: This was a wise decision. ⇒ False
Depends on the situation and which costs are avoidable if the company shuts down operations. If it produces 4 cases, the losses reduce from -$100 to -$40, but the contribution margin is positive since revenues exceed variable costs by $60. But under the current price level, the company will not be able to generate profits unless it increases its sales price or decreases its fixed costs.
Vaguely remembering his introductory economics course, the company's chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity.
At this level of production, the firm's profit is -$100.
True or False: This is the best decision the firm can make. ⇒ False
Accounting profit is maximized at 4 cases since marginal cost ($50) = sales price ($50). At this point the total profit is -$40.
