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Finding Optimal Output Level etc.

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 pits is a clay fire pit.

The spreadsheet below gives some of Redstone's production cost data. Enter this data in your own Excel spreadsheet. 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).

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 revue (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).

1. If Redstone wanted to minimize average total cost, it would produce how many units?

2. If Redstone wishes to maximize profit MARGIN, it should produce how many units.

3. What level of output should the manager of Redstone choose to produce? Explain briefly.

4. Now triple the fixed costs to 15,000 in your spreadsheet. How does this change your answer to question 4. Explain briefly.

5. 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.

Solution Preview

Please refer to attached file for missing tables.

1. If Redstone wanted to minimize average total cost, it would produce how many units?
Refer to above table, ATC is minimized at Q=300 units. It should produce 300 units.

2. If Redstone wishes to maximize profit MARGIN, it should produce how many units.
Refer to above table, Profit margin is maximized at Q=300 units. It should produce 300 units.

3. What level of output should the manager of Redstone ...

Solution Summary

Solution describes the steps to find out output levels for minimum average total cost, maximum profit margin and optimal profit. Tables attached in Excel.

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