Question

1. A firm purchased copper pipes a few years ago at $10 per pipe and stored them, using them only as the need arises. The firm could sell its remaining pipes in the market at the current price of $9. What is the opportunity cost of each remaining pipe and what is the sunk cost?

2. Assume that the fixed costs for a soybean farm, which include the costs of land, equipment and fertilizer is $10,000 per year and that labor is the only variable cost of running the farm. And assume that the firm pays each worker $2,000 a month. The productivity of labor is shown in the following table.

Amount of Labor (Person months)	Total Output (bushels)
0	0
1	5
2	14
3	27
4	36
5	44
6	48
7	51
8	52
9	54
10	54

Bases on the information above, complete the following table and graph AVC, ATC and MC (A graph produced by excel is preferable.)

Q ( bushels)	TFC ($)	TVC ($)	AFC ($)	AVC ($)	ATC ($)	MC ($)
5
27
44
51
54

3. As a member of a local advocacy group for low-income families, you have been placed in charge of organizing a one-day seminar on welfare reform.  The costs for the event are as follows:

Rent for auditorium:               $5,000

Faculty:                                   $2,500

Breakfast:                                $10 per person

Luncheon:                               $15 per person

Materials:                                $25 per person

Advertising:                            $1,500

a)  What are the average variable costs of the seminar?

b)What are the fixed costs of the seminar?

c)  Based on past events, you expect that 100 people will attend the seminar.  What price should you charge each attendee so that the seminar breaks even? (Hint: to break even, price must equal the average total cost. It is different from the shut-down decision where price need to be at least as high as average variable cost.)

d)To encourage more young people to get involved, your supervisor suggests charging students a discounted rate.  You decide to have students pay only the marginal costs of their attendance.  What price should you charge students to attend the seminar?

Answer 1

Question 1 :

Answer : The opportunity cost is $9 per pipe and sunk cost is $1 per pipe.

Question 2 :

Answer :

TFC = $10000

TVC = $2000 * labor employed

TC = TVC + TFC

AFC = TFC/Q

AVC = TVC/Q

ATC = TC/Q

MC = TCn - TCn-1

Q	TFC ($)	TVC ($)	TC ($)	AFC ($)	AVC ($)	ATC ($)	MC ($)
5	10000	2000	12000	2000	400	2400	-
27	10000	6000	16000	370.37	222.22	592.60	4000
44	10000	10000	20000	227.27	227.22	454.54	4000
51	10000	14000	24000	196.07	274.50	470.59	4000
54	10000	20000	30000	185.18	370.37	555.55	6000

Question 3 :

Answer :

Part A : Breakfast, lunch and materials will be the average variable costs as they are based on per person

AVC = 10+ 15 + 25 = $50 per person

Part B : Rent, faculty and advertising are the fixed costs. Fixed cost = 5000 + 2500 + 1500 = $9000

Part C : Fixed Costs = $9000

Total Variable Cost = AVC * 100 = $50 * 1000 = $5000

Total Cost = Fixed cost + Total Variable cost + Fixed Cost = $5000 + $9000 = $14000

ATC = Total cost/ 100 = $14000 / 100 = $140

Part D : Students should pay the variable cost per person i.e. $50 per student.