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#### 5

###### Economics

5. Profit maximization and shutting down in the short run Suppose that the market for sports Watches is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. ? 100 90 10,32 80 70 60 10,32 PRICE (Dollars per watch) 50 10,32 10,32 ATC 40 10,32 30 10,32 20 AVC MG 0,32 10,32 10 0 o 10 90 100 20 30 40 50 60 70 80 QUANTITY (Thousands of watches) 1 10,000 20,000 For each price in the following table, calculate the firm's optimal quantity of units to produce, and determine the profit or loss if it produces at that quantity, using the data from the graph to identify its total variable cost. Assume that if the firm is indifferent between producing and shutting down, it will produce. (Hint: You can select the purple points (diamond symbols) on the graph to see precise information on average variable cost.) 2 Price Quantity Total Revenue Fixed Cost Variable Cost Profit \$25.00 (Dollars per watch) (Watches) (Dollars) (Dollars) (Dollars) (Dollars) 25.00 *1 520,000 \$40.00 40.00 520,000 \$65.00 65.00 1 520,000 \$80.00 30,000 40,000 50,000 70,000 90,000 If the firm shuts down, it must incur its fixed costs (FC) in the short run. In this case, the firm's fixed cost is \$520,000 per day. In other words, if it shuts down, the firm would suffer losses of \$520,000 per day until its fixed costs end (such as the expiration of a building lease). This firm's shutdown price-that is, the price below which it is optimal for the firm to shut down-is 2 per watch.