Breakeven Point and Shutdown Point
Correct!
The marginal cost of producing the third unit is the total variable costs of producing the third unit minus the total variable costs of producing the second unit, $$ 18.00 - 14.50 = CNY\ 3.50. $$
Since the company is producing at the profit-maximizing output level, this is the output level where the price, which is also the marginal revenue for a perfectly competitive firm, is equal to the marginal cost of CNY 3.50. The total revenue at the output level of 3 is $$ 3.50 \times 3 = CNY\ 10.50. $$ This is less than the total variable costs at the output of 3, which is CNY 18.00.
Because the company does not earn enough to cover its total variable costs at this level of output, it can minimize losses by shutting down production to limit its losses to its fixed costs.
A profit-maximizing company makes a good in a perfectly competitive industry. The company's accountant has gathered the following information about the firm's cost structure (in CNY thousands):
| Output (Q) | Total Variable Costs (TVC) | Total Fixed Costs (TFC) |
|----------|----------------------------|------------------------|
| 0 | 0.00 | 10.00 |
| 1 | 10.50 | 10.00 |
| 2 | 14.50 | 10.00 |
| 3 | 18.00 | 10.00 |
| 4 | 24.00 | 10.00 |
| 5 | 33.00 | 10.00 |
The output level where the company should shut down for the short term is _closest_ to:
Incorrect.
This output level is above the breakeven level of output. At the output level of 5, the marginal cost of producing that 5th unit is 9 (the difference of total variable costs for that unit), suggesting a price of 9 as well. This leads to total revenue of CNY 45, while total costs are CNY 43. The company should continue to operate at this level for the short run and the long run.
Incorrect.
The fourth unit added 6 to the costs, and so this is assumed to be the price at this level as well for a perfect competitor.
At this point the total revenue of 24 is less than the total costs but is equal to or greater than the total variable costs. The company should continue to operate at this level for the short run.
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