Reference no: EM131732451

John produces DVD movies for sale, which requires a building and a machine that copies the original movie onto a DVD. He rents a building for $30,000 per month and rents a machine for $20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying table.

Quantity of DVDs         VC

0                                 $      0

1,000                            5,000

2,000                            8,000

3,000                            9,000

4,000                          14,000

5,000                           20,000

6,000                           33,000

7,000                           49,000

8,000                            72,000

9,000                            99,000

10,000                        150,000

Assume that DVD production is a perfectly competitive industry. For each of the following questions, explain your answers.

a. What is John's break-even price? What is his shutdown price?

b. Suppose the price of a DVD is $2. What should John do in the short run?

c. Suppose the price of a DVD is $7. What is the profit-maximizing quantity of DVDs that John should produce? What will his total profit be? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run?