Ted has been a fisherman all of his life. Ted realizes the risk he takes as a business whose market structure is a perfectly competitive market. Ted is analyzing whether he should stay in business. He is fortunate that all of his nets, fishing gear are all paid for but Ted still has other fixed and variable costs that he incurs as a part of doing business.
Help Ted analyze his cost information and serve as his business consultant.
Here is some cost information that Ted has given you:
Fixed Costs are $50,000 per year. Insurance, dock space, and rental of fish processing equipment.
Total Total
Number of Fixed Variable
Fish Caught Costs Costs
1,000 50,000 $25,000
2,000 50,000 $40,000
3,000 50,000 $90,000
Questions
1. What is the lowest Average Total Cost that Ted can operate his business? In other words, at what cost do we reach the bottom of the average total cost curve?
2. At a market price of $51 per fish, what quantity does Ted process and what is the firm’s accounting profit at this output? (remember the profit maximization rule)
3. At a market price of $45 per fish, what quantity does Ted process and what is the firm’s accounting profit at this output?
4. Ted is now faced with more competition. The market price of fish has dropped $22 per fish. Should Ted stay in business or shut down his operation? Also, what quantity of fish should he process at this point, if applicable?
5. Based on the information given, what is Ted’s shutdown point in terms of price? In other words, what market price will force Ted to shut down his operation?