In this Assessment, you will demonstrate your understanding and ability to defin
ID: 1139415 • Letter: I
Question
In this Assessment, you will demonstrate your understanding and ability to define and calculate the five major cost elements of a business when given the total costs and the quantity produced, as well as how to use the computed costs to determine a minimum cost output level for that business. In addition, you will compute both the break-even price and the shut-down price for a hypothetical business in a perfectly competitive market, as well as determining if that business would incur an economic profit at various market prices and if the firm should continue to produce at each of those price levels. You will also explain how the spreading effect and the diminishing returns effect cause changes in average total costs.
Directions:
Using the Word template provided, answer the following questions based on the situation.
3. In Table 2, for each level of output, insert the following values into the table:
a. the Variable Cost (VC);
b. the Average Variable Cost (AVC);
c. the Average Total Cost (ATC); and,
d. the Average Fixed Cost (AFC).
Table 2
Cases of LED light bulbs produced in an hour
Total Cost
Variable Costs
Average Variable Costs
Average Total Costs
Average Fixed Cost
a.
b.
c.
d.
0
$4,500
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
e. Given the information you computed in Table 2, what is the minimum cost output level? Explain why.
Table 2
Cases of LED light bulbs produced in an hour
Total Cost
Variable Costs
Average Variable Costs
Average Total Costs
Average Fixed Cost
a.
b.
c.
d.
0
$4,500
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
Explanation / Answer
Fixed Cost for producing LED light bulbs = $4,500 as this is the cost incurred when there is no production of LED light bulbs
FC = TC + VC
VC = TC - FC
AVC = VC/Output
ATC = TC/Output
AFC = FC/Output
0
The firm's minimum cost output is achieved at the quantity that corresponds to the minimum average total cost (ATC). In this case, the minimum cost output level is 60 cases of LED light bulbs.
Cases of LED light bulbs produced in an hour Total Cost Variable Costs Average Variable Costs Average Total Costs Average Fixed Cost0
$4,500 $0 n/a n/a n/a 10 $4,900 $400 $40 $490 $450 20 $5,100 $600 $30 $255 $225 30 $5,300 $800 $26.67 $176.67 $150 40 $5,400 $900 $22.50 $135 $112.50 50 $5,700 $1,200 $24 $114 $90 60 $6,700 $2,200 $36.67 $111.67 $75 70 $7,900 $3,400 $48.57 $112.85 $64.28 80 $9,700 $5,200 $65 $121.25 $56.25 90 $11,800 $7,300 $81.11 $131.11 $50