[siewminlee]

Your coffee mug company is currently producing at an output level of 200 units per month. Fixed costs are $500 per month. At the current output level, marginal cost and average total cost are both $10. At an output level of 150, marginal cost and average variable cost will both be $6. The market price is $8.

a. To maximize profit, should output remain at 200 units or change?
b. Would it be better to shut down the company?

Please help me to solve this with explanation so that I can understand. Anybody?

[pready]

First step is to calculate your sales amount for each scenario:
Scenario 1; 200 units times your sale price of $8 equals your total sales amount for scenario 1
Scenario 2; 150 units times your sale price of $8 equals your total sales amount for scenario 2

Now you need to calculate your total costs for each scenario:
Scenario 1; 200 units times your marginal and average total cost of $10 per unit, then add your fixed cost of $500 to get your total costs for scenario 1.
Scenario 2; 150 units times your marginal and average total cost of $6 per unit, then add your fixed cost of $500 to get your total costs for scenario 2.

Now to get your profit amount for each scenario:
Scenario 1; Take your total sales amount for scenario 1 minus your total costs for scenario 1 to get your profit for scenario 1.
Scenario 2; Take your total sales amount for scenario 2 minus your total costs for scenario 2 to get your profit for scenario 2.


Finally you can answer your questions. For number a, which scenario has the higher profit. For number b, are you losing money, which means is your profit a positive number or a negative number. If a negative number it is better to shut down the company. This one is a judgment call with your reasoning. Are your profits under each scenario so small that it would be better to shut down the company or are they big enough to continue making mugs.