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Calculating a Newspaper's Breakeven Point

You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1 million per month that you can't get out of. You also have a marginal printing cost of $.25 per paper as well as a marginal delivery cost of $.10 per paper. If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month, what happens to the AFC per paper, the MC per paper, and the minimum amount that you must charge to break even on these costs?

Solution Preview

1. See the attached file. AFC rises from 1.50 to 1.875, MC does not change, and my breakeven price is equal to my AFC.

2. See the attached file.
a) The firm maximizes its profit at the highest level of output where MR>MC. When Price = $56, the firm will produce 8 units and make a profit of $7.87 per unit.
b) The firm will ...

Solution Summary

Given price and cost data, this solution shows how to calculate a newspaper's breakeven point in the short run and then recalculate it when conditions change in the long run.