Concept explainers
a
To find:
a
Explanation of Solution
The annual capacity of plants A, B, and C are 75,000, 150,000, and 350,000 units, respectively. Production beyond annual capacities requires multiple plants of the same type. And hence, the fixed costs would increase by the same multiples too.
Unit variable costs are $9, $8 and $7 for plant A, B, and C, respectively.
The schedule below shoes the average total cost for Plant A for varying output levels.
|
Q |
VC (1) |
FC (2) |
TC (1)+(2) |
ATC |
|
25,000 |
$9(25,000) =$225,000 |
$150,000 |
$375,000 |
$15 |
|
50,000 |
$9(50,000) =$450,000 |
$150,000 |
$600,000 |
$12 |
|
75,000 |
$9(75,000) =$675,000 |
$150,000 |
$825,000 |
$11 |
|
100,000 |
$9(100,000) =$900,000 |
2($150,000) =$300,000 |
$1,200,000 |
$12 |
|
125,000 |
$9(125,000) =$1,125,000 |
2($150,000) =$300,000 |
$1,425,000 |
$11.40 |
|
150,000 |
$9(150,000) =$1,350,000 |
2($150,000) =$300,000 |
$1,650,000 |
$11 |
|
175,000 |
$9(175,000) =$1,575,000 |
3($150,000) =$450,000 |
$2,025,000 |
$11.57 |
|
200,000 |
$9(200,000) =$1,800,000 |
3($150,000) =$450,000 |
$2,025,000 |
$11.25 |
|
225,000 |
$9(225,000) =2,025,000 |
3($150,000) =$450,000 |
$2,475,000 |
$11 |
|
250,000 |
$9(250,000) =$2,250,000 |
4($150,000) =$600,000 |
$2,850,000 |
$11.40 |
|
275,000 |
$9(275,000) =$2,475,000 |
4($150,000) =$600,000 |
$3,075,000 |
$11.18 |
|
300,000 |
$9(300,000) =$2,700,000 |
4($150,000) =$600,000 |
$3,300,000 |
$11 |
|
325,000 |
$9(325,000) =$2,925,000 |
5($150,000) =$750,000 |
$3,675,000 |
$11.31 |
|
350,000 |
$9(350,000) =$3,150,000 |
5($150,000) =$750,000 |
$3,900,000 |
$11.14 |
The schedule below shows the average total cost for Plant B for varying output levels.
| Q | VC(1) | FC(2) | TC(1)+(2) | ATC |
|
25,000 |
$8(25,000) =$200,000 |
$250,000 |
$450,000 |
$18 |
|
50,000 |
$8(50,000) =$400,000 |
$250,000 |
$650,000 |
$12 |
|
75,000 |
$8(75,000) =$600,000 |
$250,000 |
$850,000 |
$11.33 |
|
100,000 |
$8(100,000) =$800,000 |
$250,000 |
$1,050,000 |
$10.50 |
|
125,000 |
$8(125,000) =$1,000,000 |
$250,000 |
$1,250,000 |
$10 |
|
150,000 |
$8(150,000) =$1,200,000 |
$250,000 |
$1,450,000 |
$9.67 |
|
175,000 |
$8(175,000) =$1,400,000 |
2($250,000) =$500,000 |
$1,900,000 |
$10.86 |
|
200,000 |
$8(200,000) =$1,600,000 |
2($250,000) =$500,000 |
$2,100,000 |
$10.50 |
|
225,000 |
$8(225,000) =$1,800,000 |
2($250,000) =$500,000 |
$2,300,000 |
$10.22 |
|
250,000 |
$8(250,000) =$2,000,000 |
2($250,000) =$500,000 |
$2,500,000 |
$10 |
|
275,000 |
$8(275,000) =$2,200,000 |
2($250,000) =$500,000 |
$2,700,000 |
$9.82 |
|
300,000 |
$8(300,000) =$2,400,000 |
2($250,000) =$500,000 |
$2,900,000 |
$9.67 |
|
325,000 |
$8(325,000) =$2,600,000 |
3($250,000) =$750,000 |
$3,350,000 |
$10.31 |
|
350,000 |
$8(350,000) =$2,800,000 |
3($250,000) =$750,000 |
$3,550,000 |
$10.14 |
The schedule below shows the average total cost for Plant C for varying output levels.
| Q | VC(1) | FC(2) | TC(1)+(2) | ATC |
|
25,000 |
$7(25,000) =$175,000 |
$450,000 |
$625,000 |
$25 |
|
50,000 |
$7(50,000) =$350,000 |
$450,000 |
$800,000 |
$16 |
|
75,000 |
$7(75,000) =$525,000 |
$2450,000 |
$975,000 |
$13 |
|
100,000 |
$7(100,000) =$700,000 |
$450,000 |
$1,150,000 |
$11.50 |
|
125,000 |
$7(125,000) =$875,000 |
$450,000 |
$1,325,000 |
$10.60 |
|
150,000 |
$7(150,000) =$1,050,000 |
$450,000 |
$1,500,000 |
$10 |
|
175,000 |
$7(175,000) =$1,225,000 |
$450,000 |
$1,675,000 |
$9.57 |
|
200,000 |
$8(200,000) =$1,600,000 |
$450,000 |
$2,850,000 |
$9.25 |
|
225,000 |
$7(225,000) =$1,575,000 |
$450,000 |
$2,025,000 |
$9 |
|
250,000 |
$7(250,000) =$1,750,000 |
$450,000 |
$2,200,000 |
$8.80 |
|
275,000 |
$7(275,000) =$1,925,000 |
$450,000 |
$2,375,000 |
$8.64 |
|
300,000 |
$8(300,000) =$2,100,000 |
$450,000 |
$2,550,000 |
$8.50 |
|
325,000 |
$7(325,000) =$2,275,000 |
$450,000 |
$3,725,000 |
$8.38 |
|
350,000 |
$7(350,000) =$2,450,000 |
$450,000 |
$3,900,000 |
$8.29 |
Introduction:
Fixed costs (FC) are the costs that the firm has to incur irrespective of the level of output.
Variable costs (VC) are the costs that vary with the level of output, that is, increase as the output level increases, and vice versa.
Total cost (TC) is the total cost incurred by the firm in the production process. It is the sum of fixed cost and variable cost.
Average total cost
b)
To ascertain:Long run average total cost schedule.
b)
Explanation of Solution
The combined long-run average cost schedule for three plants is as given below:
|
Q |
Long Run ATC |
| 25,000 | $15 |
| 50,000 | $12 |
| 75,000 | $11 |
| 100,000 | $10.50 |
| 125,000 | $10 |
| 150,000 | $9.67 |
| 175,000 | $9.57 |
| 200,000 | $9.25 |
| 225,000 | $9 |
| 250,000 | $8.80 |
| 275,000 | $8.64 |
| 300,000 | $8.50 |
| 325,000 | $8.38 |
| 350,000 | $8.29 |
For output level beyond 75,000 units (production capacity of plant A), average total cost is lower for plant B. Similarly, for output level beyond 150,000 units (production capacity of plant B), average total cost is lower for plant C.
Introduction:
Fixed costs (FC) are the costs that the firm has to incur irrespective of the level of output.
Variable costs (VC) are the costs that vary with the level of output, that is, increase as the output level increases, and vice versa.
Total cost (TC) is the total cost incurred by the firm in the production process. It is the sum of fixed cost and variable cost.
Average total cost
Want to see more full solutions like this?
Chapter 8 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
- 1. We want to examine the comparative statics of the Black Scholes model. Complete the following table using the Excel model from class or another of your choice. Provide the call premium and the put premium for each scenario. Underlier Risk-free Scenario price rate Volatility Time to expiration Strike Call premium Put premium Baseline $50 5% 25% 1 year $55 Higher strike $50 5% 25% 1 year $60 Higher volatility $50 5% 40% 1 year $55 Higher risk free $50 8% 25% 1 year $55 More time $50 5% 25% 2 years $55 2. Look at the baseline scenario. a. What is the probability that the call is exercised in the baseline scenario? b. What is the probability that the put is exercised? c. Explain why the probabilities sum to 1.arrow_forwardSome people say that since inflation can be reduced in the long run without an increase in unemployment, we should reduce inflation to zero. Others believe that a steady rate of inflation at, say, 3 percent, should be our goal. What are the pros and cons of these two arguments? What, in your opinion, are good long-run goals for reducing inflation and unemployment?arrow_forwardExplain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve. Explain in words how and why the income and interest sensitivities of the demand for real balances affect the slope of the LM curve. According to the IS–LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances?a. The central bank increases the money supply.b. The government increases government purchases.c. The government increases taxes.arrow_forward
- Suppose that a person’s wealth is $50,000 and that her yearlyincome is $60,000. Also suppose that her money demand functionis given by Md = $Y10.35 - i2Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on her demand for bonds?b. What are the effects of an increase in income on her demand for money and her demand for bonds? Explain in wordsarrow_forwardImagine you are a world leader and you just viewed this presentation as part of the United Nations Sustainable Development Goal Meeting. Summarize your findings https://www.youtube.com/watch?v=v7WUpgPZzpIarrow_forwardPlease draw a standard Commercial Bank Balance Sheet and briefly explain each of the main components.arrow_forward
- Please draw the Federal Reserve System’s Balance Sheet and briefly explain each of the main components.arrow_forward19. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. How does the Federal Reserve currently get the federal funds rate where they want it to be?arrow_forward18. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. Carefully compare and contrast fiscal policy and monetary policy.arrow_forward
- 15. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. What are the common arguments for and against high levels of federal debt?arrow_forward17. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. Explain the difference between present value and future value. Be sure to use and explain the mathematical formulas for both. How does one interpret these formulas?arrow_forward12. Give the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. Show and carefully explain the Taylor rule and all of its components, used as a monetary policy guide.arrow_forward
Managerial Economics: Applications, Strategies an...EconomicsISBN:9781305506381Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. HarrisPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Microeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506893Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning