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BU224-3: How do changes in the cost of production affect …

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# BU224-3: How do changes in the cost of production affect pricing and production quantity decisions of a firm in a perfectly competitive market.

In this assignment, you will be assessed on the following Outcomes:

BU224-3: Examine how changes in the cost of production affect pricing and production quantity decisions of a firm in a perfectly competitive market.

GEL-8.02: Apply critical thinking to use principles of sound reasoning.

Assignment

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

What is this manufacturer’s fixed cost? Explain why.
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:
Variable Cost (VC);
Average Variable Cost (AVC);
Average Total Cost (ATC);
Average Fixed Cost (AFC); and,
Marginal Costs (of a single case).
In Table 3.a., for each level of output, insert into the table the values for the:
Variable Cost (VC);
Average Variable Cost (AVC);
Average Total Cost (ATC); and,
Average Fixed Cost (AFC).
Table 3.a.

Cases of LED light bulbs produced in an hour

Total Cost

Variable Costs

(3 points)

a.

Average Variable Costs

(3 points)

b.

Average Total Costs

(3 points)

c.

Average Fixed Cost

(3 points)

d.

0

\$4,500

n/a

n/a

n/a

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

Given the information you computed in Table 3.a., what is the minimum cost output level? Explain why.
Brenda Smith operates her own farm raising chickens and producing eggs. She sells her eggs at the local farmers’ market where there are several other egg producers also selling eggs by the dozen. (Brenda operates in a perfectly competitive market in which she is a “price taker.”) In order to make sure she does not lose money on selling eggs, she does an analysis of her costs for producing eggs as shown on Table 4.a.
Table 4.a.

Dozens of eggs

Fixed Cost

Total Cost

Variable Costs

Average Variable Costs per dozen

Average Total Costs per dozen

0

\$3.35

\$3.35

n/a

n/a

n/a

10

\$3.35

\$10.50

\$7.15

\$0.72

\$1.05

20

\$3.35

\$16.40

\$13.05

\$0.65

\$0.82

30

\$3.35

\$23.10

\$19.75

\$0.66

\$0.77

40

\$3.35

\$30.00

\$26.65

\$0.67

\$0.75

50

\$3.35

\$36.50

\$33.15

\$0.66

\$0.73

60

\$3.35

\$48.00

\$44.65

\$0.74

\$0.80

70

\$3.35

\$64.40

\$61.05

\$0.87

\$0.92

80

\$3.35

\$80.00

\$76.65

\$0.96

\$1.00

90

\$3.35

\$135.00

\$131.65

\$1.46

\$1.50

What is Brenda’s break-even price for a dozen of eggs? Explain how you found that answer.
What is Brenda’s shut-down price for a dozen of eggs? Explain how you found that answer.
If the market price of a dozen eggs at the local farmers market is \$1.45 per dozen, will Brenda make an economic profit? Explain how you determined your answer.
If the market price of a dozen eggs at the local farmers market is \$1.45 per dozen, should Brenda continue producing eggs in the short-run? Explain how you determined your answer.
If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.
If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, should Brenda continue producing eggs in the short-run? Explain how you determined your answer.
If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.
If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, should Brenda continue producing eggs in the short-run? Explain how you determined your answer.

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