Cost & Quantity Produced

Apply critical thinking to use principles of sound reasoning.

In this Assessment, you will demonstrate your understanding and ability to define and calculate the five major cost elements of a business when given the total costs and the quantity produced, as well as how 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 shut-down price for a hypothetical business in a perfectly competitive market, as well as determining if that business would incur an economic profit at various market prices and if the firm should continue to produce at each of those price levels. You will also explain how the spreading effect and the diminishing returns effect cause changes in average total costs.

Directions:

Using the Word template provided below in the Minimum Submission Requirements, answer the following questions based on the situation.

Questions

Table 1 shows an LED light bulb manufacturers total cost of producing LED light bulbs.

Table 1

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 manufacturers fixed cost? Explain why.

2. Assuming that you only know the total costs (TC) (as is shown in the Table 1 above) explain how you would calculate each of the following:

a.  Variable Cost (VC);

b.  Average Variable Cost (AVC);

c.  Average Total Cost (ATC);

d.  Average Fixed Cost (AFC); and,

e.  Marginal Costs (of a single case).

3. In Table 2, for each level of output, insert the following values into the table:

a.  the Variable Cost (VC);

b.  the Average Variable Cost (AVC);

c.  the Average Total Cost (ATC); and,

d.  the Average Fixed Cost (AFC).

Table 2

Cases of LED light bulbs produced in an hour

Total Cost

Variable Costs

Average Variable Costs

Average Total Costs

Average Fixed Cost

a.

b.

c.

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

e.  Given the information you computed in Table 2, what is the minimum cost output level? Explain why.

4. 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 3.

Table 3

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 Brendas 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.
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.
Minimum Submission Requirements

This Assessment should be submitted in this template.
Respond to the questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions. Your paper should be highly organized, logical, and focused.
Your paper must be written in Standard English and demonstrate exceptional content, organization, style, grammar, and mechanics.
Your paper should provide a clearly established and sustained viewpoint and purpose.
Your writing should be well ordered, logical and unified, as well as original and insightful.
A separate page at the end of your paper should contain a list of references, in APA format. Use your textbook, the Library, and the internet for research.
Be sure to cite both in-text and reference list citations were appropriate and reference all sources. Your sources and content should follow proper APA citation style. Review the APA formatting and citation style found in the Writing Center. The Writing Center can be found within the Academic Support Center under Academic Tools in the left navigation of your course. (It should be in Times New Roman 12-point font, include correct citations, Standard English with no spelling or punctuation errors, and correct references at the bottom of the last page.)

 

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