Question

Mondi Company produces party boxes that are sold in bundles of 1000 boxes. The market is highly competitive with boxes currently selling for R100 per thousand. The company has a total and marginal cost curve given by: TC= 3 000 000+0.001Q² MC= 0.002Q Q is measured in thousand boxes bundles per year a) Determine Mondi's profit maximizing quantity? b) Calculate if the firm is earning a profit or loss? c) Based on the analysis above, should Mondi Company operate or shut down in the shortrun?

Answer 1

(a)

$TC=3,000,000+0.001Q^2$

$MC=0.002Q$

$TR=P\times Q$

$=100Q$

$MR=100$

At profit maximizing quantity:

$MC=MR$

$0.002Q=100$

$Q=50,000.$

(b)

$TR=100\times50,000=5,000,000$

$TC=3,000,000+0.001(50,000^2).$

$=25,003,000,000$

Profit/Loss $=TR -TC$

$=5,000,000 - 25,003,000,000$

$=-20,003,000,000.$

Thus, the firm is earning a loss.

(c)

In the short run, the firm should shut down because from the analysis, it is not earning revenue to cover its variable costs.