Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 12, Problem 5P
To determine

Concept Introduction

Marginal Cost: This refers to the change in the cost which is incurred when an additional unit of any good or service is produced. It shall be calculated as follows:

    Economics, Chapter 12, Problem 5P , additional homework tip  1

Shut-down Price: This is the level of price when the revenue is equal to the variable cost. This happens when the price is equal to the lowest average variable cost. When the price falls below this level, the production of goods shall shut-down.

Expert Solution & Answer
Check Mark

Explanation of Solution

a. Graph to show Bob’s marginal cost curve.

The below table shows the calculation of marginal cost:

    Quantity Produced(A)Change in Quantity(B)Fixed Cost($)(C)Variable Cost($)(D)Total Cost($)(E)Economics, Chapter 12, Problem 5P , additional homework tip  2Change in Total Cost($)(F)Marginal Cost($)Economics, Chapter 12, Problem 5P , additional homework tip  3
    0 - 50,000 0 50,000 - -
    1,000 1,000 50,000 5,000 55,000 5,000 5
    2,000 1,000 50,000 8,000 58,000 3,000 3
    3,000 1,000 50,000 9,000 59,000 1,000 1
    4,000 1,000 50,000 14,000 64,000 5,000 5
    5,000 1,000 50,000 20,000 70,000 6,000 6
    6,000 1,000 50,000 33,000 83,000 13,000 13
    7,000 1,000 50,000 49,000 99,000 16,000 16
    8,000 1,000 50,000 72,000 122,000 23,000 23
    9,000 1,000 50,000 99,000 149,000 27,000 27
    10,000 1,000 50,000 150,000 200,000 51,000 51

As per the marginal cost calculated in the above table, below is the graph that shows Bob’s marginal cost curve:

Economics, Chapter 12, Problem 5P , additional homework tip  4

Fig 1

Conclusion:

Thus, the above graph shows the marginal curve drawn from the marginal costs calculated.

b. Range of price over which Mr. Bob will produce no units.

The below table shows the calculation of average variable cost:

    Quantity Produced(A)Variable Cost($)(B)Average Variable Cost($)Economics, Chapter 12, Problem 5P , additional homework tip  5
    0 0 0
    1,000 5,000 5
    2,000 8,000 4
    3,000 9,000 3
    4,000 14,000 3.5
    5,000 20,000 4
    6,000 33,000 5.5
    7,000 49,000 7
    8,000 72,000 7
    9,000 99,000 11
    10,000 150,000 15

Shut-down price is the level when the price is equal to the lowest average variable cost. Thus, as per the above table, the shut-down price is $3.

Mr. Bob will not produce any quantity when the price of a product falls below the shut-down price, which is $3. Hence, the range of price over which there will be no production is $0 to $3.

Conclusion:

Thus, the range of prices where there will be no production is $0 to $3.

c. Graph to show Mr. Bob’s individual supply curve.

The below table shows the marginal cost and average variable cost of Mr. Bob:

    Quantity ProducedMarginal Cost($)Average Variable Cost($)
    0 - 0
    1,000 5 5
    2,000 3 4
    3,000 1 3
    4,000 5 3.5
    5,000 6 4
    6,000 13 5.5
    7,000 16 7
    8,000 23 7
    9,000 27 11
    10,000 51 15

As per the marginal cost and average variable cost in the above table, below is the graph that shows Bob’s individual supply curve:

Economics, Chapter 12, Problem 5P , additional homework tip  6

Fig 2

  • The above graph shows that Mr. Bob will continue the production only if the price is above $3 which is the shut-down price.
  • Hence, the production level at prices below the shut-down price of $3 is nil.

Conclusion:

Thus, the graph is shown for Mr. Bob’s individual supply curve.

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