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Homework answers / question archive / John runs a print shop that makes posters for large companies
John runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently 1 euro per poster. He has fixed costs of 250 euros. His variable costs are 1,000 euros for the first thousand posters, 800 euros for the second thousand, and then 750 euros for each additional thousand posters.
a. What is his AFC per poster (not per thousand!) if he prints 1000 posters?
b. What is his AFC per poster (not per thousand!) if he prints 2000 posters?
c. What is his AFC per poster (not per thousand!) if he prints 10,000 posters?
d. What is his ATC per poster if he prints 1000 posters?
e. What is his ATC per poster if he prints 2000 posters?
f. What is his ATC per poster if he prints 10,000 posters?
g. If the market price fell to 0.70 euro per poster, would there be any output level at which John would not shut down production immediately?
a. Let us compute the average fixed costs if he prints 1,000 posters. The formula is:
His AFC if he prints 1,000 posters is 0.25 euros per poster.
b. Let us compute the average fixed costs if he prints 2,000 posters.
His AFC if he prints 2,000 posters is 0.125 euros per poster.
c. Let us compute the average fixed costs if he prints 10,000 posters.
His AFC if he prints 10,000 posters is 0.025 euros per poster.
d. First, we compute the average variable cost if he prints 1,000 posters.
Now, we can compute the average total cost.
His ATC if he prints 1,000 posters is 1.25 euros.
e. Let us compute the average variable costs if he prints 2,000 posters. His total variable costs is 1,800 euros (1,000 + 800).
Now, we can compute the average total cost.
His ATC if he prints 2,000 posters is 1.025 euros.
f. Let us compute the average variable costs if he prints 10,000 posters. His total variable costs is 7,800 euros (1,000 + 800 + 750 x 8).
Now, we can compute the average total cost.
His ATC if he prints 10,000 posters is 0.805 euros.
g. The firm will shutdown when the price of the product is equal to the average variable cost. Based on our previous computations, there is no output level which John would not shut down production immediately. The average variable costs when output level is 10,000 is 0.78 euros. Therefore, John does not shot down production immediately.
