Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fire pits for patios. They are one of about two dozen firms around the world that manufacture and sell clay fire pits for retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. There is virtually no product differentiation; a clay fire pit is a clay fire pit.
The spreadsheet below gives some of Redstone’s production cost data. Enter this data in your own Excel spreadsheet. (Remember our discussion of Smith Farms in the Attend session!) Add columns 5, 6, 7, and 8 to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC). You will send me the spreadsheet via the Drop Box. Don’t send it yet, however, because you will need to add more columns, as explained below.
(1) (2) (3) (4)
Q TC TFC TVC
0 5000 5000 0
100 10000 5000 5000
200 19000 5000 14000
300 27000 5000 22000
400 38000 5000 33000
500 50000 5000 45000
600 66000 5000 61000
700 84000 5000 79000
800 104000 5000 99000
900 126000 5000 121000
1000 150000 5000 145000
The world market demand and supply curves for clay fire pots intersect at $190 per unit. Add columns 9, and 10 to show, respectively, total revenue (TR) and marginal revenue (MR). Add column 11 to show profit (i.e., TR-TC). Add column 12 to show profit per unit (i.e., average profit). Add column 13 to show profit margin (i.e., price minus average total cost).
Submit your Excel spreadsheet to the Drop Box. [Hint: At Q = 400: AVC = 82.50, SMC = 110, MR = 190, profit = 38,000, and profit margin = 95].
If Redstone wanted to minimize average total cost, it would produce how many units?
If Redstone wishes to maximize profit MARGIN, it should produce how many units.
What level of output should the manager of Redstone choose to produce? Explain briefly.
Now triple the fixed costs to 15,000 in your spreadsheet. How does this change your answer to question 3.
Suppose that Nancy Pelosi declares that clay fire pits are causing global warming, and demand for fire pits shrinks substantially in the U.S. (especially in California). Fire pit prices fall worldwide to $65. Now, the manager of Redstone should produce how many units? Explain your answer.