M I K E F L A D L I E NM U S C A T I N E H I G H S C H O O L

CLASSIC LOSS MINIMIZING POSITION

ASSUMPTION OF THE MODEL

• Fixed Costs are $20

• Variable Costs = 2X^2

• Total Cost = $20 + 2X^2

• Marginal Cost = 4X

• Average Total Cost = 20/X + 2X

• Price = Marginal Revenue = demand

GRAPH OF MODEL

Quantity Fixed Cost Variable Cost Total Cost Marginal

cost ATC AVC Price Profit

0 $20.00 $- $20.00 $20.00 $(20.00)

0.5 $20.00 $0.50 $20.50 $2.00 $41.00 $1.00 $20.00 $(10.50)

1 $20.00 $2.00 $22.00 $4.00 $22.00 $2.00 $20.00 $(2.00)

1.5 $20.00 $4.50 $24.50 $6.00 $16.33 $3.00 $20.00 $5.50

2 $20.00 $8.00 $28.00 $8.00 $14.00 $4.00 $20.00 $12.00

2.5 $20.00 $12.50 $32.50 $10.00 $13.00 $5.00 $20.00 $17.50

3 $20.00 $18.00 $38.00 $12.00 $12.67 $6.00 $20.00 $22.00

3.5 $20.00 $24.50 $44.50 $14.00 $12.71 $7.00 $20.00 $25.50

4 $20.00 $32.00 $52.00 $16.00 $13.00 $8.00 $20.00 $28.00

4.5 $20.00 $40.50 $60.50 $18.00 $13.44 $9.00 $20.00 $29.50

5 $20.00 $50.00 $70.00 $20.00 $14.00 $10.00 $20.00 $30.00

5.5 $20.00 $60.50 $80.50 $22.00 $14.64 $11.00 $20.00 $29.50

6 $20.00 $72.00 $92.00 $24.00 $15.33 $12.00 $20.00 $28.00

6.5 $20.00 $84.50 $104.50 $26.00 $16.08 $13.00 $20.00 $25.50

GRAPH OF PROFIT MAXIMIZATION

WHEN PRICE IS LESS THAN AVC

• When the price is $10, the price is less than ATC but greater that AVC• This is the classic “loss minimizing position”• The firm does not shut down• The firm can pay its labor costs• The firm can cover some of its fixed costs

• If the firm shut down, then it would lose more that if it continued operating

TABLE OF LOSS MINIMIZING POSITION

GRAPH OF LOSS MINIMIZING POSITION

0 2 4 6 8 10 12 14 16 $-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

Marginal costATCAVCPrice

ANALYSIS

• At a Price of $10• Fixed costs are $20• Variable costs are $12.50• The firm loses $7.50• Total Revenue is $25

• The firm can pay her labor costs• The firm spreads out part of her fixed costs• It’s better for the firm to remain open

CONCLUSION

• Please send all of comments to• mfladlien@gmail.com