Assignment

Define and calculate the remaining six major cost elements of a business when given the total costs and the quantity produced. Use the computed costs to determine a minimum cost output level for that business. Next, you will compute both the break-even price and the shutdown price for a hypothetical business in a perfectly competitive market. Then you will determine if that business would incur an economic profit at various market prices, and if the business should continue to produce at each of those price levels.

Questions

Table 1 shows an LED light bulb manufacturer’s total cost of producing LED light bulbs at various output levels.

Table 1
Cases of LED light bulbs produced in an hour Total Costs
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 how you determined your answer.

2. Using the data from Table 2 below, show at least one step-by-step calculation for each of the following:

a. Variable Costs (VC)
b. Average Variable Costs (AVC)
c. Average Total Costs (ATC)
d. Average Fixed Costs (AFC)
e. Marginal Costs (of a single case)

3. In Table 2, for each level of output, calculate and insert into the table the values for:
a. Variable Costs (VC)
b. Average Variable Costs (AVC)
c. Average Total Costs (ATC)
d. Average Fixed Costs (AFC)
e. Marginal Costs (MC)

Table 2
Cases of LED light bulbs produced in an hour Total Cost Variable Costs

a. Average Variable Costs
b. Average Total Costs
c. Average Fixed Cost

d. Marginal Costs e.
0 $4,500n/a n/a n/a n/a
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

4. Given the information you computed in Table 2, what is the minimum cost output level? Explain why.

5. 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.”) 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 3

Table 3
Dozens of eggs Fixed Cost Total Cost Variable Costs Average Variable Costs per dozen Average Total Costs per dozen
0 $3.35 $3.35
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 eggs? Explain how you found that answer.

b. What is Brenda’s shutdown price for a dozen eggs? Explain how you found that answer.

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.

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.

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.

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. 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.

g. 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.