Question

In: Economics

1. Costs with a wage of $24 Volume Total Cost    AC MC 0 80000 20000...

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

Solutions

Expert Solution

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.


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