Analyze the major short run cost functions for this firm assuming they are repre
ID: 1213481 • Letter: A
Question
Analyze the major short run cost functions for this firm assuming they are represented by the equations below. Suggest substantive ways in which you may use this information to make production decisions in the short-run and possibly the long run. TC = 160,000,000 + 100Q + 0.00632Q2 VC = 100Q + 0.00632Q2 MC= 100 + 0.0126Q Hints: What is the equation for average total costs? How is this useful? What is the output level and dollar value associated with minimum average total cost and minimum average variable costs? TC = 160,000,000 + 100Q + 0.00632Q 2 Equation for average total costs = 160,000,000 / Q+ 100+ 0.00632 Q Equation for average total costs = 100+ 160,000,000 Q-1 + 0.00632 Q dc/dq = -1 X 160,000,000 Q-2 + 0.00632 160,000,000 / Q2 = 0.00632 Q = 159,111 units ( out level) TC = 160,000,000 + 100Q + 0.00632Q 2 TC = $ 335 ,910 , 181.20 ( dollar value) VC = 100Q + 0.00632Q 2 Average variable costs = 100 + 0.00632 Q dvc/dq = 0.00632 The output level associated with minimum average variable costs = 0 dollar value = $ 100 . This is the question: Outline a plan, or use your results above, to evaluate this firm’s financial performance. Consider all the key drivers of performance, such as total revenue, total cost, total profit, etc. Assuming production is operating at its optimal scale (min. ATC = min. LRATC), is the firm earning positive or negative profits in the short run? Is this profitability likely to change in the long run? Hint: To calculate profit in the short run, use the cost, price, and output levels you generated in part 5. Hint: Profit in the long run will be driven down or up to zero if there are no significant market barriers to entry or exit. The question is: Recommend two (2) actions the firm could take to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations.
Explanation / Answer
Answer:
Given information is:
TC = 160,000,000 + 100Q + 0.00632Q2
VC = 100Q + 0.00632Q2
MC= 100 + 0.0126Q
ATC = TC/Q
ATC= 160,000,000/Q + 100 + 0.00632Q
Therefore, Q = 159,111 units
Now we can substitute Q value into the TC function and MC functions, then we get:
TC = $ 335,910,181.20
MC = 100 + 0.0126(159,111) = $2104.80
Profit = Total Revenue – Total Cost
Now, let's set equilibrium price level to P. In the short run, marginal cost = marginal revenue, so
That is: P = MR = MC
Total Revenue = P*Q
= $2104.80 * 159,111
Therefore, TR = $334,896,833
Now firm’s profit or loss = $334,896,833 - $335,910,181.20
= -1013348.20
Therefore, the firm is earning negative profits (loss) in short-run, because the total cost is greater than the total revenue. However, in the long-run it will make profits.