14. Profit maximization and shutting down in the short run Suppose that the market for dress shirts is a competitive mar

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14. Profit maximization and shutting down in the
short run
Suppose that the market for dress shirts is a competitive
market. The following graph shows the daily cost curves of a firm
operating in this market.
0246810121416182050454035302520151050PRICE (Dollars per
shirt)QUANTITY (Thousands of shirts)MCATCAVC
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.)
Price
Quantity
Total Revenue
Fixed Cost
Variable Cost
Profit
(Dollars per shirt)
(Shirts)
(Dollars)
(Dollars)
(Dollars)
(Dollars)
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 $135,000 per
day. In other words, if it shuts down, the firm would suffer losses
of $135,000 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 per shirt.