In this Assignment, you will be assessed on the following outcomes:
AB224-3: Examine how changes in the cost of production affect pricing and production quantity decisions of a firm in a perfectly competitive market.
GEL-8.5: Apply critical thinking to the field of study.
In this Assignment, you will define and calculate the remaining six major cost elements of a business, when given the Total Costs and the Quantity Produced, as well as to use the computed costs to determine a minimum cost output level for that business. In addition, you will compute both the break-even price and the shut-down price for a hypothetical business in a perfectly competitive market, and determine if that business would incur an economic profit at various market prices, and should the firm continue to produce at each of those price levels.
Table 2.a. shows an LED light bulb manufacturerâ€™s total cost of producing LED light bulbs.
Cases of LED light bulbs produced in an hour Total Cost
1. What is this manufacturerâ€™s fixed cost? Explain why.
2. Assuming that you only know the Total Costs (TC) (as is shown in the Table 2.a. above) explain how you would calculate each of the following:
a. Variable Cost (VC);
b. Average Variable Cost (AVC);
c. Average Total Cost (ATC);
d. Average Fixed Cost (AFC); and,
e. Marginal Costs (of a single case).
3. In Table 3.a., for each level of output, insert into the table the values for:
a. the Variable Cost (VC);
b. the Average Variable Cost (AVC);
c. the Average Total Cost (ATC); and,
d. the Average Fixed Cost (AFC).
Cases of LED light bulbs produced in an hour Total Cost Variable Costs Average Variable Costs Average Total Costs Average Fixed Cost
a. b. c. d.
0 $4,500 n/a n/a n/a
e. Given the information you computed in Table 3.a., what is the minimum cost output Level? Explain why.
4. Brenda Smith operates her own farm, raising chickens and producing eggs. She sells her eggs at the local farmersâ€™ market, where there are several other egg producersâ€™ also selling eggs by the dozen. (Brenda operates in a perfectly competitive market in which she is a â€œprice taker.â€) In order to make sure she does not lose money on selling eggs, she does an analysis of her costs for producing eggs as shown on Table 4.a.
Dozens of eggs Fixed Cost Total Cost Variable Costs Average Variable Costs per dozen Average Total Costs per dozen
0 $3.35 $3.35 n/a n/a n/a
10 $3.35 $10.50 $7.15 $0.72 $1.05
20 $3.35 $16.40 $13.05 $0.65 $0.82
30 $3.35 $23.10 $19.75 $0.66 $0.77
40 $3.35 $30.00 $26.65 $0.67 $0.75
50 $3.35 $36.50 $33.15 $0.66 $0.73
60 $3.35 $48.00 $44.65 $0.74 $0.80
70 $3.35 $64.40 $61.05 $0.87 $0.92
80 $3.35 $80.00 $76.65 $0.96 $1.00
90 $3.35 $135.00 $131.65 $1.46 $1.50
a. What is Brendaâ€™s break-even price for a dozen of eggs? Explain how you found that answer.
b. What is Brendaâ€™s shut-down price for a dozen of eggs? Explain how you found that answer.
c. If the market price of a dozen eggs at the local farmersâ€™ market is $1.45 per dozen, will Brenda make an economic profit? Explain how you determined your answer.
d. If the market price of a dozen eggs at the local farmersâ€™ market is $1.45 per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.
e. If the market price of a dozen eggs at the local farmersâ€™ market is 72 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.
f. If the market price of a dozen eggs at the local farmersâ€™ market is 72 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.
g. If the market price of a dozen eggs at the local farmersâ€™ market is 64 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.
h. If the market price of a dozen eggs at the local farmersâ€™ market is 64 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.
Topic: Real-World Monopolies
Describe an example of a real-world industry or market that would be considered by economists to be a natural monopoly.
1. What characteristics of the industry make it a monopoly?
2. What is the impact of the monopoly power on its customers?
3. Why might government want to regulate natural monopolies?
4. How might such regulation be structured?
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