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.