Chapter 17, Problem 4P

Sub Part (a):

To determine

The decision-making process related to power plant.

Explanation of Solution

The total cost of catching 30 tons of fish by ‘ER’ can be calculated as follows:

$\begin{array}{c}\text{Total cost}=\left(\begin{array}{l}\left(\text{First five tons}\times {\text{Cost per ton}}_{\text{for 5 tons}}\right)\\ +\left(\text{Total quantity required}-5\text{ tons}\right)\times {\text{Cost per ton}}_{\text{Above 5 tons}}\end{array}\right)\\ =\left(5\times 1,000\right)+\left(30\text{tons}-5\text{tons}\right)\times 2,500\\ =5,000+62,500\\ =67,500\end{array}$

To catch 30 tons, the cost for ‘ER’ is $6,000.

The total cost of catching 30 ton fish by ‘KY’ can be calculated as follows:

$\begin{array}{c}\text{Total cost}={\left(\begin{array}{l}\left(\text{First 15 tons}\times {\text{Cost per ton}}_{\text{Above 15 tons}}\right)\\ +\left(\text{Total quantity required}-15\text{ tons}\right)\times {\text{Cost per ton}}_{\text{Above 15 tons}}\end{array}\right)}_{}\\ =\left(15\times 3,000\right)+\left(30\text{tons}-15\text{tons}\right)\times 1,400\\ =45,000+21,000\\ =66,000\end{array}$

To catch 30 tons, the cost for ‘KY’ is $66,000.

Since the total cost of fishing for ‘KY’ is less than the other person, ‘KY’ should catch the entire fist.

The average cost can be calculated as follows:

$\begin{array}{c}\text{Average cost}=\frac{\text{Total cost}}{\text{Total quantity}}\\ =\frac{66,000}{30}\\ =2,200\end{array}$

The average cost is $2,200 per ton.

Economics Concept Introduction

Concept introduction:

Decision-making process: The decision-making process refers to the process of finalizing the choice between the available alternatives through collecting respective information and assessing it.

Sub Part (b):

To determine

The decision-making process related to power plant.

Explanation of Solution

The first five ton cost of fishing for ‘ER’ is less than the ‘KY’. The additional ton cost for ‘ER’ is greater than the additional cost of ‘KY’. Thus, first 5 tons should be caught by ‘ER’ and the remaining fish should be caught by ‘KY’. The total cost for this combination can be calculated as follows:

$\begin{array}{c}\text{Total cost}={\left(\begin{array}{l}\left(\text{First 5 ton ER}\times {\text{Cost per ton ER}}_{\text{For 5 tons}}\right)\\ +\left(\text{First 15 ton KY}\times {\text{Cost per ton KY}}_{\text{Above 15 tons}}\right)\\ +\left(\text{Total quantity required KY}-15\text{ tons}\right)\times {\text{Cost per ton KY}}_{\text{Above 15 tons}}\end{array}\right)}_{}\\ =\left(5\times 1,000\right)\left(15\times 3,000\right)+\left(25\text{tons}-15\text{tons}\right)\times 1,400\\ =5,000+45,000+14,000\\ =64,000\end{array}$

The total cost is $64,000.

The average cost can be calculated as follows.

$\begin{array}{c}\text{Average cost}=\frac{\text{Total cost}}{\text{Total quantity}}\\ =\frac{64,000}{30}\\ =2,133.33\end{array}$

The average cost is $2,133.33 per ton.

Economics Concept Introduction

Concept introduction:

Decision-making process: The decision-making process refers to the process of finalizing the choice between the available alternatives through collecting respective information and assessing it.

Sub Part (c):

To determine

The ER's profit.

Explanation of Solution

ER’s total profit can be calculated as follows.

$\begin{array}{c}\text{Total profit}=\text{Quantity}\times \text{Price}-\left(\begin{array}{l}\left(\text{First five tons}\times {\text{Cost per ton}}_{\text{for 5 tons}}\right)\\ +\left(\text{Total quantity required}-5\text{ tons}\right)\times {\text{Cost per ton}}_{\text{Above 5 tons}}\end{array}\right)\\ =30\times 3,000-\left(\left(5\times 1,000\right)+\left(30\text{tons}-5\text{tons}\right)\times 2,500\right)\\ =90,000-\left(5,000+62,500\right)\\ =22,500\end{array}$

ER’s total profit is $22,500. ER’s total profit after selling 25 tons can be calculated as follows.

$\begin{array}{c}\text{Total profit}=\left({\text{Quantity}}_{\text{5 tons}}\times \left(\text{Price}-{\text{Cost}}_{\text{For 5 ton}}\right)\right)+\left(\text{Quantity sold}\times {\text{Selling price}}_{\text{ITQ}}\right)\\ =\left(5\times \left(3,000-1,000\right)\right)+\left(25\times 550\right)\\ =10,000+13,750\\ =23,750\end{array}$

ER’s total profit after selling the ITQ is $23,750.

Sub part (d):

To determine

Who would be willing to offer $500 for additional 25 tons.

Explanation of Solution

The person ER can earn $500 $\left(3,000-2,500\right)$ per unit for additional 25 tons. Thus, the person KY would ready to offer $500 for the additional 25 tons.