Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
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Chapter 13, Problem 4PA

Subpart (a):

To determine

The fixed cost, average variable cost, average total cost, and marginal cost, profit or loss of the firm if they shutdown, profit or loss of the firm if they continue to produce.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

The table – 1 represents the value of the cost of the production.

Table – 1

Quantity Total fixed cost Total variable cost
0 100 0
1 100 50
2 100 70
3 100 90
4 100 140
5 100 200
6 100 360

The average fixed cost can be determined by using the formula.

Average fixed cost=Total fixed costQuantity (1)

Substitute the respective value in equation (1) to calculate the average fixed cost for 1st unit.

Average fixed cost=1001=100

The average fixed cost is $100.

The table - 2 shows the value of the average fixed cost that is obtained by using the equation (1).

Table - 2

Quantity Total fixed cost Total variable cost Average fixed cost
0 100 0
1 100 50 100
2 100 70 50
3 100 90 33.3
4 100 140 25
5 100 200 20
6 100 360 16.7

The average variable cost can be determined by using the formula.

Average variable cost=Total variable costQuantity (2)

Substitute the respective value in equation (2) to calculate the average variable cost for 1st unit.

Average variable cost=501=50

The average variable cost is $50.

The table -3 shows the value of the average variable cost that is obtained by using the equation (2).

Table – 3

Quantity Total fixed cost Total variable cost Average fixed cost Average variable cost
0 100 0
1 100 50 100 50
2 100 70 50 35
3 100 90 33.3 30
4 100 140 25 35
5 100 200 20 40
6 100 360 16.7 60

The average total cost can be determined by using the following formula.

Average total cost=Average variable cost +Average fixed cost (3)

Substitute the respective value in equation (3) to calculate the average total cost for 1st unit.

Average total cost=100+50=150

The average total cost is $150.

The table -4 shows the value of the average total cost thatis obtained by using the equation (3).

Table – 4

Quantity Total fixed cost Total variable cost Average fixed cost Average variable cost Average total cost
0 100 0
1 100 50 100 50 150
2 100 70 50 35 85
3 100 90 33.3 30 63.3
4 100 140 25 35 60
5 100 200 20 40 60
6 100 360 16.7 60 76.7

The marginal cost can be determined by using the formula.

Marginal cost=Variable costPresentVariable costPrevious QuantityPresentQuantityPrevious (4)

Substituting the respective value into equation (4) and calculate the marginal cost for 1st unit.

Marginal cost=(7050)10=201=20

The marginal cost is $20.

The table -5 shows the value of the marginal cost that is obtained by using the equation (4).

Table – 5

Quantity Total fixed cost Total variable cost Average fixed cost Average variable cost Average total cost Marginal cost
0 100 0
1 100 50 100 50 150 50
2 100 70 50 35 85 20
3 100 90 33.3 30 63.3 20
4 100 140 25 35 60 50
5 100 200 20 40 60 60
6 100 360 16.7 60 76.7 160
Economics Concept Introduction

Concept Introduction:

Average fixed cost: The average fixed cost is the total fixed cost per unit of the output produced by the firm.

Average total cost: Initially average total cost will decline as fixed cost spreads over a larger number of units but the curve will go up when the marginal cost increases.

Average variable cost: Average variable cost refers to the variable cost per unit.

Marginal cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.

Subpart (b):

To determine

The fixed cost, average variable cost, average total cost, and marginal cost, profit or loss of the firm if they shutdown, profit or loss of the firm if they continue to produce.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

Suppose the price of the ball bearing $50, the firm can produce 4 unit of the output because the price is equal to marginal cost that is the profit maximizing condition. Then the total cost of the production is $240 ($100+$140) and revenue can earn by the firm is $200 ($50×4) , which means that the firm incurs loss of $40 ($240$200) . So in the short run, the revenue is less than the variable cost and the firm has shut down its production. By shutting down, they suffer a loss which is equal to their fixed cost $100but in the short run firm continues to produce when the operating profit is used to balance the fixed cost and minimizes the losses, so the chief executive officer decision of shutdown is not wise.

Economics Concept Introduction

Concept Introduction:

Average fixed cost: The average fixed cost is the total fixed cost per unit of the output produced by the firm.

Average total cost: Initially average total cost will decline as fixed cost spreads over a larger number of units but the curve will go up when the marginal cost increases.

Average variable cost: Average variable cost refers to the variable cost per unit.

Marginal cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.

Subpart (c):

To determine

The fixed cost, average variable cost, average total cost, and marginal cost, profit or loss of the firm if they shutdown, profit or loss of the firm if they continue to produce.

Subpart (c):

Expert Solution
Check Mark

Explanation of Solution

Suppose CEO decides to produce 1 unit of ball, then the total cost of the firm is $150  ($100+$50) and total revenue of the firm is $50 ($50×1) which means that firm incurs loss of $100 ($150$50) . Since, the marginal cost of the next two outputs is lower than the price level and that is a benefit for the firm by reducing losses, so if they produce only one output, the decision is not the best one.

Economics Concept Introduction

Concept Introduction:

Average fixed cost: The average fixed cost is the total fixed cost per unit of the output produced by the firm.

Average total cost: Initially average total cost will decline as fixed cost spreads over a larger number of units but the curve will go up when the marginal cost increases.

Average variable cost: Average variable cost refers to the variable cost per unit.

Marginal cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.

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Students have asked these similar questions
Ball Bearings, Inc., faces costs of production as follows:a. Calculate the company’s average fixed cost, average variable cost, average total cost,and marginal cost at each level of production.b. The price of a case of ball bearings is $50. Seeing that he can’t make a profit, thechief executive officer (CEO) decides to shut down operations. What is the firm’sprofit/loss? Was this a wise decision? Explain.c. Vaguely remembering his introductory economics course, the chief financial officertells the CEO it is better to produce 1 case of ball bearings, because marginal revenueequals marginal cost at that quantity. What is the firm’s profit/loss at that level ofproduction? Was this the best decision? Explain
The question is related to economics/finance/accounting.
“A firm that earns only normal profit is not covering all its costs.” Do you agree or disagree?
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