Question

In: Economics

Ball Bearings, Inc., faces costs of production as follows: QUANITY TOTAL FIXED COSTS (DOLLARS) TOTAL VARIABLE...

Ball Bearings, Inc., faces costs of production as follows:

QUANITY	TOTAL FIXED COSTS (DOLLARS)	TOTAL VARIABLE COSTS (DOLLARS)
0	180	0
1	180	80
2	180	140
3	180	180
4	180	240
5	180	320
6	180	450

Complete the following table by calculating the company’s total cost, marginal cost, average fixed cost, average variable cost, and average total cost at each level of production.

QUANITY	TOTAL COST (DOLLARS)	MARGINAL COST (DOLLARS)	AVERAGE FIXED COST (DOLLARS)	AVERAGE VARIABLE COST (DOLLARS)	AVERAGE TOTAL COST (DOLLARS)
0	?	----------------	-------------------	----------------------	--------------------
1	?	?	80/180/260	80/180/260	80/180/260
2	?	?	70/90/160	70/90/160	70/90/160
3	?	?	60/120	60/120	60/120
4	?	?	45/60/105	45/60/105	45/60/105
5	?	?	36/64/100	36/64/100	36/64/100
6	?	?	30/75/105	30/75/105	30/75/105

The price of a case of ball bearings is $80. Seeing that he can’t make a profit, the company's chief executive officer (CEO) decides to shut down operations.

The firm’s profit in this case is $__???

. (Note: If the firm suffers a loss, enter a negative number in the previous cell.)

True or False: This was a wise decision.

True

False

Vaguely remembering his introductory economics course, the company's chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity.

At this level of production, the firm’s profit is $____??? . (Note: If the firm suffers a loss, enter a negative number in the previous cell.).

True or False: This is the best decision the firm can make.

True

False

Expert Solution

Q	TC	MC	AFC	AVC	ATC
0	180
1	260	80	180	80	260
2	320	60	90	70	160
3	360	40	60	60	120
4	420	60	45	60	105
5	500	80	36	64	100
6	630	130	30	75	105

ATC = TC/Q, AVC = VC/Q, AFC = FC/Q

TC = VC + FC

MC (nth unit) = TC (n units) - TC ((n-1) units)

The price of a case of ball bearings is $80. Seeing that he can’t make a profit, the company's chief executive officer (CEO) decides to shut down operations.

The firm’s profit in this case is - $180 (firm loses the fixed costs)

This was not a wise decision (firm would have earned some contribution margin because P > min AVC (shutdown point) if it had chosen to continue operations)

Vaguely remembering his introductory economics course, the company's chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity.

At this level of production, the firm’s profit is = 80 x 1 - 260 = - $ 180

This is not the best decision (statement is false, MR = MC maximizes profit when MC is increasing in nature)

Rahul Sunny answered 2 years ago

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