ECONOMICS W/CONNECT+20  >C<
ECONOMICS W/CONNECT+20 >C<
20th Edition
ISBN: 9781259714993
Author: McConnell
Publisher: MCG CUSTOM
Question
Book Icon
Chapter 15, Problem 2P

Sub part (a):

To determine

The total cost, average total cost and the profit.

Sub part (a):

Expert Solution
Check Mark

Explanation of Solution

The total cost can be calculated by adding all the fixed as well as the variable costs that the firm incurs during the process of production together, as follows:

Total Cost=Fixed costs+Variable costs (1)

The average total cost is the average cost of producing a unit. It is calculated by dividing the total cost with the total output as follows:

Average Total Cost=Total costTotal output (2)

The profit is the excess revenue over the cost that the firm generates through the sale of the product. It can be calculated by subtracting the total cost from the total revenue.

Here, the fixed cost of capital of the firm is $1,000. The firm uses 100 units of labor and 450 units of raw materials. The cost of the raw materials and the labor is the variable cost of the firm. The cost of a unit of labor is $12 and that of raw material is $4 per unit. Thus, the total cost of producing 5,000 units of output can be calculated by adding the fixed costs as well as the variable costs together, using equation (1):

Total Cost=1,000+[(100×12)+(450×4)]=1,000+[1,200+1,800]=1,000+2,800=4,000

Thus, the total cost of producing 5,000 units is $4,000. The average total cost can be calculated by dividing the total cost with the total output. The total cost is $4,000 and the total output is 5,000. Thus, the values can be substituted in equation (2) to calculate the average total cost as follows:

Average Total Cost=4,0005,000=0.80

Thus, the average total cost is $0.80.

Economics Concept Introduction

Concept introduction:

Total cost: Total cost is the summation of all the fixed as well as variable costs of the production.

Average total cost: Average total cost is the cost per unit, which can be calculated by dividing the total cost with the total output.

Sub part (b):

To determine

The total cost, average total cost and the profit.

Sub part (b):

Expert Solution
Check Mark

Explanation of Solution

The quantity of labor used as well as the raw material used in the process of production is the same as before and thus, there is no change in the cost of production at all. Thus, the total cost of production remains the same; $4,000.

Since there is an increase in the total quantity of production, it will affect the average total cost of production. The total output increases to 6,000 and the total cost remains at $4,000. We can substitute these values in equation (2) to calculate the average total cost as follows:

Average Total Cost=4,0006,000=0.67

Thus, the average total cost is $0.67.

Economics Concept Introduction

Concept introduction:

Total cost: Total cost is the summation of all the fixed as well as variable costs of the production.

Average total cost: Average total cost is the cost per unit, which can be calculated by dividing the total cost with the total output.

Profit: It is the excess revenue over the cost.

Sub part (c):

To determine

The total cost, average total cost and the profit.

Sub part (c):

Expert Solution
Check Mark

Explanation of Solution

The price per unit is given as $1. The total output in the first production process is 5,000. Thus, the total revenue can be calculated by multiplying the total output with per unit price as follows:

Total Revenue=Total output×Per unit price=5,000×1=5,000

Thus, the total revenue from using the old method is $5,000. The total cost of production is $4,000 and thus, the total profit in the production can be calculated by subtracting the total cost from the total revenue as follows:

Profit=Total RevenueTotal cost=5,0004,000=1,000

Thus, the profit is $1,000 from the old production process.

The total output increases to 6,000 in the modern production process and the price per unit remains the same. Thus, the total revenue from the modern production process can be calculated by multiplying the total output with the per unit price as follows:

Total Revenue from new method=6,000×1=6,000

Thus, the total revenue from the new production process is $6,000. The total cost of production is $4,000 and thus, the total profit in the production can be calculated by subtracting the total cost from, total revenue as follows:

Profit=Total RevenueTotal cost=6,0004,000=2,000

The difference in the revenue from the modern and the old production process is the profit of the firm from the improvement in the production process. Thus, the profit can be calculated by subtracting the old profit from the new profit as follows:

Profit=ProfitNew methodProfitOld method=2,0001,000=1,000

Thus, the profit from the improved production process is $1,000.

Economics Concept Introduction

Concept introduction:

Total cost: Total cost is the summation of all the fixed as well as variable costs of the production.

Average total cost: Average total cost is the cost per unit, which can be calculated by dividing the total cost with the total output.

Profit: It is the excess revenue over the cost.

Sub part (d):

To determine

The total cost, average total cost and the profit.

Sub part (d):

Expert Solution
Check Mark

Explanation of Solution

There is only an additional profit of $1,000 for the firm while using the improved production process. When there is a one-time cost of implementation which is $1,100, there will be an increase in the total cost of production by $1,100 which will reduce the profit from $1,000. Thus, the firm will choose not to implement the progress when it considers only profit of 1 year.

When the firm considers future revenues, the one-time cost will only reduce the profit for the next year and for the rest of the life of the production, it will provide $1,000 more revenue than the old method. Thus, the firm will choose to implement the progress.

Economics Concept Introduction

Concept introduction:

Total cost: Total cost is the summation of all the fixed as well as variable costs of the production.

Average total cost: Average total cost is the cost per unit, which can be calculated by dividing the total cost with the total output.

Profit: It is the excess revenue over the cost.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
1. After the reopening of borders with mainland China following the COVID-19 lockdown, residents living near the border now have the option to shop for food on either side. In Hong Kong, the cost of food is at its listed price, while across the border in mainland China, the price is only half that of Hong Kong's. A recent report indicates a decline in food sales in Hong Kong post-reopening. ** Diagrams need not be to scale; Focus on accurately representing the relevant concepts and relationships rather than the exact proportions. (a) Using a diagram, explain why Hong Kong's food sales might have dropped after the border reopening. Assume that consumers are indifferent between purchasing food in Hong Kong or mainland China, and therefore, their indifference curves have a slope of one like below. Additionally, consider that there are no transport costs and the daily food budget for consumers is identical whether they shop in Hong Kong or mainland China. I 3. 14 (b) In response to the…
2. Health Food Company is a well-known global brand that specializes in healthy and organic food products. One of their main products is organic chicken, which they source from small farmers in the area. Health Food Company is the sole buyer of organic chicken in the market. (a) In the context of the organic chicken industry, what type of market structure is Health Food Company operating in? (b) Using a diagram, explain how the identified market structure affects the input pricing and output decisions of Health Food Company. Specifically, include the relevant curves and any key points such as the profit-maximizing price and quantity. () (c) How can encouraging small chicken farmers to form bargaining associations help improve their trade terms? Explain how this works by drawing on the graph in answer (b) to illustrate your answer.
2. Suppose that a farmer has two ways to produce his crop. He can use a low-polluting technology with the marginal cost curve MCL or a high polluting technology with the marginal cost curve MCH. If the farmer uses the high-polluting technology, for each unit of quantity produced, one unit of pollution is also produced. Pollution causes pollution damages that are valued at $E per unit. The good produced can be sold in the market for $P per unit. P 1 MCH 0 Q₁ MCL Q2 E a. b. C. If there are no restrictions on the firm's choices, which technology will the farmer use and what quantity will he produce? Explain, referring to the area identified in the figure Given your response in part a, is it socially efficient for there to be no restriction on production? Explain, referring to the area identified in the figure If the government restricts production to Q1, what technology would the farmer choose? Would a socially efficient outcome be achieved? Explain, referring to the area identified in…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning
Text book image
ECON MICRO
Economics
ISBN:9781337000536
Author:William A. McEachern
Publisher:Cengage Learning
Text book image
Microeconomic Theory
Economics
ISBN:9781337517942
Author:NICHOLSON
Publisher:Cengage
Text book image
Microeconomics: Principles & Policy
Economics
ISBN:9781337794992
Author:William J. Baumol, Alan S. Blinder, John L. Solow
Publisher:Cengage Learning
Text book image
Principles of Microeconomics
Economics
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Principles of Economics 2e
Economics
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:OpenStax