In this Assessment, you will demonstrate your understanding and ability to defin
ID: 1139785 • 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.
Questions
Table 1 shows an LED light bulb manufacturer’s total cost of producing LED light bulbs.
Table 1
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.
2. Assuming that you only know the total costs (TC) (as is shown in the Table 1 above) explain how you would calculate each of the following:
a. Variable Cost (VC);
b. Average Variable Cost (AVC);
c. Average Total Cost (ATC);
d. Average Fixed Cost (AFC); and,
e. Marginal Costs (of a single case).
Table 1
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
Explanation / Answer
1) The manufacturers fixed cost is 4,500. Because the manufacturer is facing the given cost even when the production of the good is zero.
2) a) variable cost = Total cost - the fixed cost. (we know the fixed cost is 4,500). So, to calculate the variable cost we will subtract the total cost amount by 4,500.)
b) Average variable cost = Total variable cost / total quantity. For example, the total good produced is 50. total cost is 5,700. Variable cost = 5,700 - 4,500 = 1,200. The average variable cost will be 1,200 /50 = 24.
c) Average total cost = Total cost / Total quantity.
For example, the total cost of 50 goods is 5,700. Average total cost = 5,700 /50 = 114.
d) Average fixed cost = Fixed cost / total quantity.
4,500 / 90 = 50. The fixed cost will remain the same at all level of production.
e) marginal cost is the changes in the total cost in relation to change in the single unit produced. So, we will get a change in the cost = 4900 -4500 / change in the quantity = 10 - 0
We get 500 / 10. Marginal cost is 50.