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Subpart (a):
The fixed cost, average variable cost , average total cost , and marginal cost, profit or loss of the firm if they shutdown, profit or loss of the firm if they continue to produce.
Subpart (a):
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Explanation of Solution
The table – 1 represents the value of the cost of the production.
Table – 1
Quantity | Total fixed cost | Total variable cost |
0 | 100 | 0 |
1 | 100 | 50 |
2 | 100 | 70 |
3 | 100 | 90 |
4 | 100 | 140 |
5 | 100 | 200 |
6 | 100 | 360 |
The average fixed cost can be determined by using the formula.
Average fixed cost=Total fixed costQuantity (1)
Substitute the respective value in equation (1) to calculate the average fixed cost for 1st unit.
Average fixed cost=1001=100
The average fixed cost is $100.
The table - 2 shows the value of the average fixed cost that is obtained by using the equation (1).
Table - 2
Quantity | Total fixed cost | Total variable cost | Average fixed cost |
0 | 100 | 0 | – |
1 | 100 | 50 | 100 |
2 | 100 | 70 | 50 |
3 | 100 | 90 | 33.3 |
4 | 100 | 140 | 25 |
5 | 100 | 200 | 20 |
6 | 100 | 360 | 16.7 |
The average variable cost can be determined by using the formula.
Average variable cost=Total variable costQuantity (2)
Substitute the respective value in equation (2) to calculate the average variable cost for 1st unit.
Average variable cost=501=50
The average variable cost is $50.
The table -3 shows the value of the average variable cost that is obtained by using the equation (2).
Table – 3
Quantity | Total fixed cost | Total variable cost | Average fixed cost | Average variable cost |
0 | 100 | 0 | – | – |
1 | 100 | 50 | 100 | 50 |
2 | 100 | 70 | 50 | 35 |
3 | 100 | 90 | 33.3 | 30 |
4 | 100 | 140 | 25 | 35 |
5 | 100 | 200 | 20 | 40 |
6 | 100 | 360 | 16.7 | 60 |
The average total cost can be determined by using the following formula.
Average total cost=Average variable cost +Average fixed cost (3)
Substitute the respective value in equation (3) to calculate the average total cost for 1st unit.
Average total cost=100+50=150
The average total cost is $150.
The table -4 shows the value of the average total cost thatis obtained by using the equation (3).
Table – 4
Quantity | Total fixed cost | Total variable cost | Average fixed cost | Average variable cost | Average total cost |
0 | 100 | 0 | – | – | – |
1 | 100 | 50 | 100 | 50 | 150 |
2 | 100 | 70 | 50 | 35 | 85 |
3 | 100 | 90 | 33.3 | 30 | 63.3 |
4 | 100 | 140 | 25 | 35 | 60 |
5 | 100 | 200 | 20 | 40 | 60 |
6 | 100 | 360 | 16.7 | 60 | 76.7 |
The marginal cost can be determined by using the formula.
Marginal cost=Variable costPresent−Variable costPrevious QuantityPresent−QuantityPrevious (4)
Substituting the respective value into equation (4) and calculate the marginal cost for 1st unit.
Marginal cost=(70−50)1−0=201=20
The marginal cost is $20.
The table -5 shows the value of the marginal cost that is obtained by using the equation (4).
Table – 5
Quantity | Total fixed cost | Total variable cost | Average fixed cost | Average variable cost | Average total cost | Marginal cost |
0 | 100 | 0 | – | – | – | – |
1 | 100 | 50 | 100 | 50 | 150 | 50 |
2 | 100 | 70 | 50 | 35 | 85 | 20 |
3 | 100 | 90 | 33.3 | 30 | 63.3 | 20 |
4 | 100 | 140 | 25 | 35 | 60 | 50 |
5 | 100 | 200 | 20 | 40 | 60 | 60 |
6 | 100 | 360 | 16.7 | 60 | 76.7 | 160 |
Concept Introduction:
Average fixed cost: The average fixed cost is the total fixed cost per unit of the output produced by the firm.
Average total cost: Initially average total cost will decline as fixed cost spreads over a larger number of units but the curve will go up when the marginal cost increases.
Average variable cost: Average variable cost refers to the variable cost per unit.
Marginal cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.
Subpart (b):
The fixed cost, average variable cost, average total cost, and marginal cost, profit or loss of the firm if they shutdown, profit or loss of the firm if they continue to produce.
Subpart (b):
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Explanation of Solution
Suppose the price of the ball bearing $50, the firm can produce 4 unit of the output because the price is equal to marginal cost that is the profit maximizing condition. Then the total cost of the production is $240 ($100+$140) and revenue can earn by the firm is $200 ($50×4), which means that the firm incurs loss of $40 ($240−$200). So in the short run, the revenue is less than the variable cost and the firm has shut down its production. By shutting down, they suffer a loss which is equal to their fixed cost $100but in the short run firm continues to produce when the operating profit is used to balance the fixed cost and minimizes the losses, so the chief executive officer decision of shutdown is not wise.
Concept Introduction:
Average fixed cost: The average fixed cost is the total fixed cost per unit of the output produced by the firm.
Average total cost: Initially average total cost will decline as fixed cost spreads over a larger number of units but the curve will go up when the marginal cost increases.
Average variable cost: Average variable cost refers to the variable cost per unit.
Marginal cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.
Subpart (c):
The fixed cost, average variable cost, average total cost, and marginal cost, profit or loss of the firm if they shutdown, profit or loss of the firm if they continue to produce.
Subpart (c):
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Explanation of Solution
Suppose CEO decides to produce 1 unit of ball, then the total cost of the firm is $150 ($100+$50) and total revenue of the firm is $50 ($50×1) which means that firm incurs loss of $100 ($150−$50). Since, the marginal cost of the next two outputs is lower than the price level and that is a benefit for the firm by reducing losses, so if they produce only one output, the decision is not the best one.
Concept Introduction:
Average fixed cost: The average fixed cost is the total fixed cost per unit of the output produced by the firm.
Average total cost: Initially average total cost will decline as fixed cost spreads over a larger number of units but the curve will go up when the marginal cost increases.
Average variable cost: Average variable cost refers to the variable cost per unit.
Marginal cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.
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Chapter 14 Solutions
Principles of Economics (MindTap Course List)
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