Questions
Table 2.a. shows an LED light bulb manufacturer’s total cost of producing LED light bulbs.
Table 2.a.
Cases of LED light
bulbs produced in
an hour
Total Cost
0
$4,500
10
$4,900
20
$5,100
30
$5,300
40
$5,400
50
$5,700
60
$6,700
70
$7,900
80
$9,700
90
$11,800
1. What is this manufacturer’s fixed cost? Explain why.
Solution:
Manufacturer’s fixed cost is $4500 because at zero production the cost of production of bulb
is $4500 it means still firm bear fixed cost at 0 led light bulbs.
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);
Solution:
Variable cost is the cost of difference between total cost and fixed cost. As the fixed cost is
calculated in part 1answer that is $4500. Therefore, variable cost for the production of 10
LED is 4900 – 4500 = $400
b. Average Variable Cost (AVC);
Solution:
Average variable cost is calculated by dividing the variable cost to the number of production
as output. So,
Variable cost as calculated above = $400
Number of production or output = 10 unit
Average variable cost = variable cost / unit of production = 400/10 = $40 units
c. Average Total Cost (ATC);
Solution:
Average total cost is calculated by dividing the total cost to the number of output
Total cost = 4900
Number of output = 10. Therefore,
ATC = Total cost / number of unit = 4900/10 = $490 per unit
d. Average Fixed Cost (AFC); and,
Solution:
Average fixed cost is calculated as dividing the fixed cost by the number of production.
Fixed cost = 4500
Number of production = 10. Therefore,
AFC = Fixed cost / number of units = 4500/10 = $450
e. Marginal Costs (of a single case).
Solution:
Marginal cost is calculated by estimating the total cost slope in a particular point of slope. So
every increase in output level marginal cost is calculated as the difference of second cost to
first cost.
Marginal cost on first single point is TC2 – TC1 = 4900 – 4500 = $400
In Table 3.a., for each level of output, insert into the table the values for the: a. Variable Cost (VC);
b. Average Variable Cost (AVC); c. Average Total Cost (ATC); and, d. Average Fixed Cost (AFC).
Solution:
Table 3.a.
Cases of
Total Cost
LED light
Variable
Average
Average
Average
Costs
Variable
Total
Fixed Cost
Costs
Costs
a.
b.
c.
d.
0
n/a
n/a
n/a
bulbs
produced in
an hour
0
$4,500
10
$4,900
400
40.00
490.00
450.00
20
$5,100
600
30.00
255.00
225.00
30
$5,300
800
26.67
176.67
150.00
40
$5,400
900
22.50
135.00
112.50
50
$5,700
1200
24.00
114.00
90.00
60
$6,700
2200
36.67
111.67
75.00
70
$7,900
3400
48.57
112.86
64.29
80
$9,700
5200
65.00
121.25
56.25
90
$11,800
7300
81.11
131.11
50.00
e. Given the information you computed in Table 3.a., what is the minimum cost output level?
Explain why.
Solution:
As per above calculation the minimum cost output level is for the production of 60 LED light
bulbs because at this level of output, the average total cost per unit is minimum.
Brenda Smith operates her own farm raising chickens and producing eggs. She sells her eggs at the
local farmers’ market where there are several other egg producers’ also selling eggs by the dozen.
(Brenda operates in a perfectly competitive market in which she is a “price taker.”) 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.
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 Brenda’s break-even price for a dozen of eggs? Explain how you found that answer.
Solution:
Brenda break-even price for a dozen of eggs is calculated on the basis of lowest average total
cost per dozen. This refers that the company total cost and their earning are the same and
profit is zero. Therefore, Brenda break even point is lies at $0.73
b) What is Brenda’s shut-down price for a dozen of eggs? Explain how you found that answer.
Solution:
Brenda shut-down price for a dozen of eggs would be $0.65. It would be calculated where
the shut down price corresponds to the lowest variable cost.
c) If the market price of a dozen eggs at the local farmers market is $1.45 per dozen, will Brenda
make an economic profit? Explain how you determined your answer.
Solution:
If the market price of a dozen eggs at the local farmer is set at $1.45, then Brenda raises his
profit long as produces 90 dozens or more of eggs because this price is higher than any other
point of average total cost.
d) If the market price of a dozen eggs at the local farmers market is $1.45 per dozen, should Brenda
continue producing eggs in the short-run? Explain how you determined your answer.
Solution:
If the market price of a dozen eggs set at $1.45 per dozen, it refers that market price is
higher than the shut down price. Therefore, Brenda should continue the production of eggs
in the short run to capture the opportunity of earning higher profit.
e) If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, will Brenda
make an economic profit? Explain how you determined your answer.
Solution:
If the market price of dozen eggs is set at 72 cents per dozen, then Brenda will not make
their economic profit because the price is lower than the break-even price. So if Brenda
continues the chance of suffering loss would be more.
f) If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, should
Brenda continue producing eggs in the short-run? Explain how you determined your answer.
Solution:
Market price of a dozen is proposed at 72 cent and this price is higher than shut down price.
Therefore, Brenda continues producing eggs in the short run.
g) If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, will Brenda
make an economic profit? Explain how you determined your answer.
Solution;
If the market price of a dozen eggs proposed at 64 cent or $0.64 per dozen, this price lower
than Brenda breakeven price. Therefore, Brenda would not make an economic profit.
h) If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, should
Brenda continue producing eggs in the short-run? Explain how you determined your answer.
Solution;
If the market price of a dozen eggs in the local market set at 64 cent then this price is lower
than the shut down price. Therefore, Brenda would not continue their production in the
short run instead it is better to shut down the company.