In a perfect competition market, a firm's variable cost includes all the costs that vary with the quantity produced. It also shows that Price is equal to marginal revenue. In the case of a shirt manufacturing firm, the variable cost includes the cost of workers and raw materials, such as cotton, and the cost of heating and powering the factory for the day, as shown in Table.
|
Output of shirts/min (Q)
|
Fixed Cost (FC)
|
Variable Cost (VC)
|
Total Cost (TC)
|
Total Revenue (TR)
|
Price (P)
|
|
0
|
$17
|
$0
|
$17
|
$0
|
-
|
|
1
|
$17
|
$5
|
$22
|
$4
|
$4
|
|
2
|
$17
|
$6
|
$23
|
$8
|
$4
|
|
3
|
$17
|
$9
|
$26
|
$12
|
$4
|
|
4
|
$17
|
$13
|
$30
|
$16
|
$4
|
|
5
|
$17
|
$18
|
$35
|
$20
|
$4
|
|
6
|
$17
|
$25
|
$42
|
$24
|
$4
|
Table: Deciding how much shirts to produce
Using the Table above
a) Plot a graph showing the Marginal Revenue, Average Variable Cost, Average Total Cost and Marginal Cost.
b) At what conditions do the firm decides to operate?
c) What is considered as the sunk cost?
d) What is the firm's shutdown price?