Question U02A1 – Chapter Problems 3

07 Jun Question U02A1 – Chapter Problems 3

Question

U02A1 – Chapter Problems 3

Chapter 7: Problem 3 on page 162

Chapter 8: Problem 4, a through f, on pages 179–180

Chapter 9: Problem 2 on page 193

Lolita Whitfield

[email protected]

MBA 6008 – MBA6008 – Global Economic Environment

Course section 106

Luis Rivera

January 27, 2013

INTRODUCTION
ELASTICITY IN DEMAND IS BASICALLY HOW MUCH DEMAND IS FOR A PRODUCT WHEN A SUBSTANTIAL PRICE CHANGE OCCURS.

Chapter 7: Problem 3 on page 162

You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $400,000 per month, and you have contractual labor obligations of $1 million per month that you can’t get out of. You also have a marginal delivery cost of $.10 per paper. If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month, what happens to the AFC per paper, the MC per paper, and the minimum amount that you must charge to break even on these costs? (LO3)

Feedback: Consider the following example. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1 million per month that you can’t get out of. You also have a marginal printing cost of $.25 per paper as well as a marginal delivery cost of $.10 per paper. Now assume sales fall by 20 percent from 1 million papers per month to 800,000 papers per month.

Here Marginal Cost (MC) is Constant, which implies that Average Variable Cost (AVC) is constant and equals MC. This does not imply Average Total Cost (ATC) is constant or has to equal MC. Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)

Divide through by the quantity Q, which implies TC/Q = FC/Q + VC/Q.

This gives us ATC = AFC + AVC.

Now, since MC is constant (each unit of output costs MC to produce) , thus we have MCxQ = Variable Cost (VC). Note this is variable cost (VC) because we do not have to produce.

Divide this by Q, which implies that MC = VC/Q = AVC

Substituting this result into the ATC equation, we have ATC = AFC + MC (or AVC).

Thus, MC and AVC are the same in this set-up.

To break-even before the decline in sales, the company needed to charge enough to cover the AFC,, and the average variable cost (AVC) (This is the sum of the printing cost and delivery cost per paper). Thus, the company needed to charge $???? per paper.

To break-even after the decline in sales, the company needs to charge enough to cover the AFC, ???, and the average variable cost (AVC) of $??? (This is the sum of the printing cost and delivery cost per paper, note this does not change because the cost is per paper). Thus, the company needed to charge $???? per paper.

Facts:

1. Middle of one-year rental contract at $400,000 per month with labor at $1 million per month.

2. Marginal delivery cost at $.10 cents per paper

Question:

1. If sales decrease 20% (1 million to 800,000 per month )

a. What is cost of AFC per paper?

b. What is MC per paper?

c. What is minimum amount must charge to break even on costs?

Chapter 8: Problem 4, a through f, on pages 179–180

Assume that the cost data in the top table of the next column are for a purely competitive producer (LO3).

Total Product

Average Fixed Cost

Average Variable Cost

Average Total Cost

Marginal Cost

0

1

$60.00

$45.00

$105.00

$45.00

2

30.00

42.50

72.50

40.00

3

20.00

40.00

60.00

35.00

4

15.00

37.50

52.50

30.00

5

12.00

37.00

49.00

35.00

6

10.00

37.50

47.50

40.00

7

8.57

38.57

47.14

45.00

8

7.50

40.63

48.13

55.00

9

6.67

43.33

50.00

65.00

10

6.00

46.50

52.50

75.00

At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize per unit of output?
Answer the questions of 4a assuming product price is $41.
Answer the questions of 4a assuming product price is $32.
In the table below, complete the short-run supply schedule for the firm (column 1 and 2) and indicate the profit or loss incurred at each output (column 3).
(1)

Price

(2)

Qty Supplied, Single Form

(3)

Profit (+) or

Loss (-)

(4)

Qty Supplied

I500 Firms

$26

32

38

41

46

56

66

Now, assume that there are I500 identical firms in this competitive industry, that is, there are I500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4).
Suppose the market demand data for the product are as follows:
Price

Total Qty Demanded

$26

17,000

32

15,000

38

13,500

41

12,000

46

10,500

56

9500

66

8000

What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?

Chapter 9: Problem 2 on page 193

A firm in a purely competitive industry is currently producing 1000 units per day at a total cost of $450. If the firm produced 800 units per day it total cost would be $300, and if it produced 500 units per day, its total cost would be $275. What is the firm’s ATC per unit at these three levels of production? If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be? (LO5)

Feedback: Consider the following example. A firm in a purely competitive industry is currently producing 1000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275.

REFERENCES
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Economics (19th ed.). New York, NY:

McGraw-Hill. ISBN: 9780073511443.

Unknown (2009). How to calculate deadweight loss; easy 4 step method. Retrieve d from

http://www.freeeconhelp.com/2011/10/how-to-calculate-deadweight-loss-easy-4.html

Unknown (2013). Definition: marginal utility. Retrieved from

http://www.investopedia.com/terms/m/marginalutility.asp#axzz2IYhX2k9p

Unknown (2013). Midpoint elasticity formula.Retrieved from

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=midpoint+elasticity+formula