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. 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 AFC AVC ATC TR MR TR-TC Average Profit Per unit Profit Margin
0 5,000 5,000 0
100 10,000 5,000 5,000
200 19,000 5,000 14,000
300 27,000 5,000 22,000
400 38,000 5,000 33,000
500 50,000 5,000 45,000
600 66,000 5,000 61,000
700 84,000 5,000 79,000
800 104,000 5,000 99,000
900 126,000 5,000 121,000
1000 150,000 5,000 145,000
The world market demand and supply curves for clay fire pots intersects 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).
[Hint: 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.