Estimating the optimal output level
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. A template for the spreadsheet is provided in the Course Materials. You may download my template or create your own. Add columns to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC).Then, add columns to show, respectively, total revenue (TR), marginal revenue (MR), total profit, average profit, and profit margin.
Assume that the world market demand and supply curves for clay fire pots intersects at $190 per unit.
If Redstone wanted to minimize average total cost, how many units would it produce?
If Redstone wishes to maximize profit MARGIN, how many units should it produce?
What level of output should the manager of Redstone choose to produce? Explain your choice in 50-100 words.
Make a copy of your spreadsheet and triple the fixed costs to 21,000. How does this change your answer to question 3? Explain your result in 50-100 words.
Suppose that fire pits fall out of fashion and prices fall worldwide to $95. How many units should the manager choose to produce? Explain your answer in 50-100 words.