Asked by Richard Sullivan on Apr 25, 2024
Verified
Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market is highly competitive, with boxes currently selling for $100 per thousand. Conigan's total and marginal cost curves are:
TC = 3,000,000 + 0.001Q2
MC = 0.002Q
where Q is measured in thousand box bundles per year.
a. Calculate Conigan's profit maximizing quantity. Is the firm earning a profit?
b. Analyze Conigan's position in terms of the shutdown condition. Should Conigan operate or shut down in the short run?
Marginal Cost Curves
Graphs that depict how the cost of producing one more unit of a good changes as production increases.
Profit Maximizing
The process or strategy of adjusting production and operation levels to achieve the highest possible profit.
Shutdown Condition
A criterion in economics indicating the point at which a firm's revenue is not sufficient to cover its variable costs, prompting it to cease operations.
- Gain an understanding of and utilize the shutdown criterion when making corporate production determinations.
- Find the output quantity that maximizes financial gains for businesses facing various competitive situations and determine the presence or absence of economic profits or losses.
Verified Answer
MP
maria pervez7 days ago
Final Answer :
a.Given the competitive nature of the industry, Conigan should equate P to Mc.100 = 0.002Q
Q = 50,000
To determine profit:
π = TR - TC
TR = PQ
TR = $100 ∙ 50,000
TR = 5,000,000
TC = 3,000,000 + 0.001(50,000)2
TC = 3,000,000 + 2,500,000
TC = 5,500,000
π = 5,000,000 - 5,500,000
π = -500
Conigan is losing $500,000 per year.
b.To determine if the firm should operate or shutdown, we must compare P to AVc.AVC =
TVC = TC - TFC
TVC = 5,500,000 - 3,000,000
TVC = 2,500,000
AVC =
= $50
AVC = 50; P = $100
The firm should operate since P > AVC.
Q = 50,000
To determine profit:
π = TR - TC
TR = PQ
TR = $100 ∙ 50,000
TR = 5,000,000
TC = 3,000,000 + 0.001(50,000)2
TC = 3,000,000 + 2,500,000
TC = 5,500,000
π = 5,000,000 - 5,500,000
π = -500
Conigan is losing $500,000 per year.
b.To determine if the firm should operate or shutdown, we must compare P to AVc.AVC =
TVC = TC - TFCTVC = 5,500,000 - 3,000,000
TVC = 2,500,000
AVC =
= $50AVC = 50; P = $100
The firm should operate since P > AVC.
Learning Objectives
- Gain an understanding of and utilize the shutdown criterion when making corporate production determinations.
- Find the output quantity that maximizes financial gains for businesses facing various competitive situations and determine the presence or absence of economic profits or losses.