4 Your company sells Flo Rida concert DVDs Total fixed costs

4. Your company sells Flo Rida concert DVDs. Total fixed costs for your operation are $10,000 a year. The variable costs are: 60Q – Q2 (Q is in hundreds) The firm pays $400 a year in various taxes. The market price of these DVDs is $50. Flo Rida has many fans. Show your work/thought process:

a. Should the firm shut down in the short run? Explain.

b. If the firm’s fixed costs decreased from $10,000 to $8,000, would the firm shut down in the short run?

Solution

a. TC = TFC + TVC

         = 10,000 + 60Q - Q² + 400

   MC = 60 - 2Q

    P = 50

TR = PxQ = 50Q

MR = 50

For equilibrium, MR = MC

60 - 2Q = 50

2Q = 10

Q = 5

TR = 50x5 = $250

TVC = 60Q - Q² = 60x5 - 5² = $275

Therefore, the price charged in not enough to cover the variable cost. So, the firm should short down in the short run.

(b) If the firm’s fixed costs decreased from $10,000 to $8,000, the firm shut down in the short run?Because variable cost is not covered.