You are a newspaper publisher

Fixed costs (FC)= rental contract + contractual labor obligation = $500,000 + $1,000,000 = $1,500,000 per month

Variable Cost (VC) = marginal printing cost times number of paper printed + marginal delivery cost times number of papers delivered.

Assuming all papers that are produced are delivered, VC = ( 0.35 + 0.10 )Q = 0.45Q

TC=FC+VC=1,500,000+0.45QTC=FC+VC=1,500,000+0.45Q

a. Average Fixed Cost = Fixed cost / Quantity of output produced

AFC when 1000,000 papers are sold = $1,500,000 / 1,000,000 = $1.5 per paper

AFC when 800,000 papers are sold = $1,500,000 / 800,000 = $1.88 per paper

If sales fall by 20 percent, AFC increases from $1.5 per paper to $1.88 per paper.

b. Marginal cost = 0.45 and is constnt.

marginal cost = marginal printing cost of $0.35 per paper + marginal delivery cost of $0.10 per paper. = $0.45 per paper

c. What happens to the minimum amount that you must charge to break even on these costs?

Break Even point is where the profit is zero. In other words, TC = TR or ATC = P

ATC=1,500,000/Q+0.45ATC=1,500,000/Q+0.45

• Break Even Point:

1,500,000/Q+0.45=P1,500,000/Q+0.45=P

• When 1000,000 papers are sold:

ATC = $1.5 + 0.45 = $ 1.95 = P1

• When 800,000 papers are sold:

ATC = $1.88 + 0.45 = $ 2.33 =P2

The minimum amount that must be charged at the break-even point increases by $0.38.