Question

Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters. Instructions: Round your answers to 3 decimal places. a. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? What if she prints 2,000 posters? What if she prints 10,000 posters? b. What is her ATC per poster if she prints 1,000? What if she prints 2,000? What if she prints 10,000? c. If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately?

Answer 1

See explanation.

Step-by-step explanation:

Average fixed costs = Fixed costs / Number of units produced.

AFC for,

1000 posters = 250 / 1000 = $0.250/poster

2000 posters = 250 / 2000 = $0.125/poster

10,000 posters = 250 / 10,000 = $0.025/poster

Average Total cost = (Fixed costs + variable costs) / Number of posters

ATC for,

1000 posters = 250 + 1000 / 1000 = $1.250/poster

2000 posters = 250 + 1000 + 800 / 2000 = $1.025/poster

10,000 posters = [250 + 1000 + 800 + (750*7)] / 10000 = $0.805/poster

there is no output level viable as even if the fixed costs were nullified and spread over a large production volume, the marginal cost of producing each poster after the initial 2000 is 750/1000 = 0.75 cents.

This means that @ 70 cents price, there will be a 0.05 cent marginal loss.

Hope that helps.