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?