Economic Analysis

Topics: Costs, Economics, Variable cost Pages: 8 (849 words) Published: September 22, 2014


Tahania Rashid
MBA 6008 – Global Economic Environment
September 14, 2014
Unit 3 Assignment 1
Chapter 9 - Problem 3, pg. 219

Q: You are a newspaper publisher. 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 $ 0.35 per paper as well as a marginal delivery cost of $ 0.10 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? A:

The following are fixed costs:
Rent: $500,000/mo
Labor: $1,000,000
The following are variable costs:
Printing: $0.25/paper
Delivery: $0.10/paper
Fixed cost: 1,500,000/mo and marginal cost: $0.35/paper

AFC=FC/Q
At 1,000,000 papers
At 800,000 papers

AFC= 1500000/1000000
AFC=1500000/800000

AFC= $1.50/mo
AFC= $1.875/mo
MC= $0.35 per paper and does not change with the number of papers.

Minimum amount we must charge to break even is average total cost.

ATC= AFC AVC

ATC= FC/Q VC/Q

VC= MC*Q

ATC= FC/Q MC

ATC= FC/Q 0.35

At Q= 1,000,000
At Q= 800,000

ATC= 1.50, 0.35
ATC= 1.875, 0.35

ATC= $1.85
ATC= $2.225

The AFC changes from 1.50 to 1.875. That’s an increase of 0.375. The MC remains constant at 0.35 because printing and delivery costs per paper are unchanged. The minimum amount we must charge to break even increases from 1.85 to 2.225, which is an increase of 0.375.

Tahania Rashid
MBA 6008 – Global Economic Environment
September 14, 2014
Unit 3 Assignment 1
Chapter 10 – Problem 4, pg. 238

a. 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? Yes, $56 exceeds AVC (and ATC) at the profit-maximizing output. Using the MR = MC rule it will produce 8 units. Profits per unit = $7.87 (= $56 - $48.13); total profit = $62.96. b. Answer the questions of 4a assuming product price is $ 41. Yes, $41 exceeds AVC at the loss—minimizing output. Using the MR = MC rule it will produce 6 units. Loss per unit or output is $6.50 (= $41 - $47.50). Total loss = $39 (= 6 􏰀∞ $6.50), which is less than its total fixed cost of $60. c. Answer the questions of 4a assuming product price is $ 32. No, because $32 is always less than AVC. If it did produce according to the MR = MC rule, its output would be 4—found by expanding output until MR no longer exceeds MC. By producing 4 units, it would lose $82 [= 4 ($32 - $52.50)]. By not producing, it would lose only its total fixed cost of $60. d. In the table below, complete the short- run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3). Column (2) data, top to bottom: 0; 0; 5; 6; 7; 8; 9, Column (3) data, top to bottom in dollars: -60; -60; -55; -39; -8; +63; +144. e. Now assume that there are 1,500 identical firms in this competitive industry; that is, there are 1,500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4). Column (4) data, top to bottom: 0; 0; 7,500; 9,000; 10,500; 12,000; 13,500. f. 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? Equilibrium price = $46; equilibrium output = 10,500. Each firm will produce 7 units. Loss per unit = $1.14, or $8 per firm. The industry will contract in the long run.

Tahania Rashid
MBA 6008 – Global Economic Environment
September 14, 2014
Unit 3 Assignment...
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