Chapter 7, 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:

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.

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($)(E)	Change in Total Cost($)(F)	Marginal Cost($)
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:

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($)(B)	Average Variable Cost($)
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 Produced	Marginal 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:

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.