In: Economics
1. Costs with a wage of $24
Volume |
Total Cost |
AC |
MC |
0 |
80000 |
||
20000 |
280000 |
||
10000 |
180000 |
2. Costs with a wage of $20 and a time of 10 minutes
Volume |
Total Cost |
AC |
MC |
0 |
80000 |
||
20000 |
240000 |
||
10000 |
160000 |
3. Costs with a wage of $20 and a rent of $100,000
Volume |
Total Cost |
AC |
MC |
0 |
80000 |
||
20000 |
260000 |
||
10000 |
170000 |
4. Kim and Pat underwrite insurance. Each underwrites 50 accounts per month. Each account takes four hours to underwrite. The value of their time is $40 per hour. Monthly costs for each are $1,500 for an office, $2,000 for a receptionist, and $2,400 for a secretary. Calculate the average and incremental cost per case for Kim and Pat.
50 |
51 |
|
Average Cost |
||
Incremental Cost |
5. If Kim and Pat merge their operations, they would need only
one receptionist, and their rent for the joint office would be
$2,800 per month. All other values stay the same. Calculate the
average and incremental cost per case for the merged office. Are
there economies of scale at 100 accounts per month? Should Kim and
Pat merge their offices
?
Separate |
Merged |
|
Average Cost |
||
Incremental Cost |
AC = Total Cost / Volume
MC = Change in Total Cost / Change in Volume
1)
Volume | Total Cost | AC | MC |
0 | 80000 | - | - |
10000 | 180000 | 18 | 10000 |
20000 | 280000 | 14 | 10000 |
2)
Volume | Total Cost | AC | MC |
0 | 80000 | - | - |
10000 | 160000 | 16 | 8000 |
20000 | 240000 | 12 | 8000 |
3)
Volume | Total Cost | AC | MC |
0 | 80000 | - | - |
10000 | 170000 | 17 | 9000 |
20000 | 260000 | 13 | 9000 |
4) Each underwrites 50 account per month where 1 account take 4 hours each
Value of their time = $40 per hour
Variable cost = Total account * Time per account * Value of their time = 50 * 4 * 40 = 8,000
Fixed cost = Recepetionist + Office cost + Secretary = 2,000 + 1,500 + 2,400 = 5,900
Total cost of 50 account = Variable cost + Fixed cost = 8,000 + 5,900 = 13,900
Average cost of 50 accounts = (13,900 / 50) = 278
Incremental cost per account is: Time per account * Value of their time = 4 * 40 = 160
5) If they merge, fixed cost would be Recepetionist + Office cost + Secretary = 2,000 + 2,800 + 2,400 = 7,200
Variable cost will remain same. Total variable cost of 100 accounts = 100 * 4 * 40 = 16,000
Thus, total cost of 100 account = 16,000 + 7,200 = 23,200
Average cost of 100 account = (23,200 / 100) = 232
Incremental cost would be same = 40 * 4 = 160
Separate | Merged | |
Average Cost | 278 | 232 |
Incremental Cost | 160 | 160 |
There occur economies of scale at 100 account when they merge.