Implicit and Explicit Costs, economics homework help
Complete each of the following economic problems.
Problem A
Choco Delite is a manufacturer of fine chocolates. Its monthly rental expense is $1,000,000. It also has $2 million in fixed labor costs. Its marginal costs are $.70 per chocolate bar.
- If sales fall by 30 percent from 2 million chocolate bars per month to 1,400,000 chocolate bars per month, what happens to the average fixed cost (AFC) per chocolate bar?
- What happens to the marginal cost (MC) per chocolate bar?
- What about the minimum amount that can be charged to break even on these costs?
Problem B
Assume that the cost data in the table below are for a purely competitive producer:
| Total Product |
Average Fixed Cost |
Average Variable Cost |
Average Total Cost |
Marginal Cost |
Price | Price–ATC |
|---|---|---|---|---|---|---|
| 0 | ||||||
| 1 | $25.00 | $10.00 | $35.00 | $10.00 | ||
| 2 | 12.50 | 8.00 | 20.50 | 6.00 | ||
| 3 | 8.33 | 6.67 | 13.00 | 4.00 | ||
| 4 | 6.25 | 5.50 | 11.75 | 2.00 | ||
| 5 | 5.00 | 4.80 | 9.80 | 2.00 | ||
| 6 | 4.17 | 4.50 | 8.67 | 3.00 | ||
| 7 | 3.57 | 4.57 | 8.14 | 5.00 | ||
| 8 | 3.13 | 5.00 | 8.13 | 8.00 | ||
| 9 | 2.78 | 6.00 | 8.76 | 14.00 | ||
| 10 | 2.50 | 7.50 | 10.00 | 21.00 |
Respond to the following:
- How much economic profit can be achieved at each level of output? If price is $10.00, how much will be produced in the short run?
- Using the price of $4, answer the previous questions.
- Using the price of $14, answer the previous questions.
Problem C
Assume that a purely competitive firm is selling 2,000 television sets a day at a cost of $90,000. Assume that if the firm sells 1,600 units per day, its total cost would be $60,000, and if it sold 1,000 units per day, it would have a total cost of $55,000.
- Calculate the average total cost at these different sales levels.
- Assuming that the cost structure for every firm in the industry is identical, do you think that the industry could be in long-run equilibrium?
- If the industry is perfectly competitive, what would be the long-run equilibrium market price?
- If that price is the market price and every firm in the industry is earning a normal profit of 15%, what would be the profit?
Problem D
- If a hypothetical company has revenues less than its cost, should it shut down?
- If the company decides to shut down, is that decision final?
- Provide a real-world example to support your answer.
Resources
- Gean, F., & Gean, V. (2015). The desirability of an integrated learning methodology for enriching CVP analysis. Journal of Business & Accounting, 8(1), 127–137.
- McAfee, P. R. (n.d.). Introduction to economic analysis. Retrieved from http://www.mcafee.cc/Introecon/IEA.pdf
- Ahleresten, K. (2008). Essentials of microeconomics. London, GBR: Bookboon.
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