Question

In this Assignment, you will define and calculate the remaining six major cost elements of a business, when given the Total Costs and the Quantity Produced, as well as to use the computed costs to determine a minimum cost output level for that business. In addition, you will compute both the break-even price and the shutdown price for a hypothetical business in a perfectly competitive market, determine if that business would incur an economic profit at various market prices, and if the business should continue to produce at each of those price levels.

Questions

Table 2.a. shows an LED light bulb manufacturer’s total cost of producing LED light bulbs.

Table 2.a.

Cases of LED light bulbs produced in an hour	Total Cost
0	$4,500
10	$4,900
20	$5,100
30	$5,300
40	$5,400
50	$5,700
60	$6,700
70	$7,900
80	$9,700
90	$11,800

1. What is this manufacturer’s fixed cost? Explain why. (1 point)

2. Assuming that you only know the Total Costs (TC) (as is shown in the Table 2.a. above) explain how you would calculate each of the following:

Answer 1

Fixed cost is the amount of cost when the firm is producing nothing or cost at Q = 0. it doesn't depend on the Qty & hence it remains constant for al Q.

Total cost = Fixed cost + variable cost

Average fixed cost = fixed cost / Q

Average variable cost = variable cost / Q

Average total cost = Average fixed cost + Average variable cost

Marginal cost = change in total cost / change in Q or TCn - TCn-1 :-- it is the additional cost incurred by firm when it produces an additional Q

Qty. of LED	Total cost	fixed cost	variable cost	Av. fixed cost	Av. variable cost	Av. total cost	Marginal cost
0	4500	4500	0	-	-	-	-
10	4900	4500	400	450	40	490	40
20	5100	4500	600	225	30	255	20
30	5300	4500	800	150	26.67	176.67	20
40	5400	4500	900	112.5	22.5	135	10
50	5700	4500	1200	90	24	114	30
60	6700	4500	2200	75	36.67	111.67	100
70	7900	4500	3400	64.28	48.57	112.85	120
80	9700	4500	5200	56.25	65	121.25	180
90	11800	4500	7300	50	81.11	131.11	210

In a perfectly competitive market shut down price is that price level when it covers the variable cost. Hence shut-down price = minimum of AVC. Here it is 22.5(lowest AVC).

In a perfectly competitive market break price is that price level when it covers the variable cost as well as fixed cost. hence at this price it will earn only normal profit i.e. zero economic profit. Hence break-even price = minimum of AC. Here it is 111.67(lowest AC).

in perfectly competitive market, if a firm produces nothing then they have to incur a loss of amount fixed cost. Hence their main motive is to earn greater than than (- fixed cost). Henc price in the range of minimum AVC & minimum AC will have loss but still they will produce as the loss will be less than the fixed cost. And price above the AC will have positive economic profit.