BU224M3-3: Examine how changes in the cost of production affect pricing and production quantity decisions of a firm in a perfectly competitive market.
GEL-8.02: Apply critical thinking to use principles of sound reasoning.
In this assessment, you will demonstrate your understanding and ability to define and calculate the six major cost elements of a business, when given the total costs and the quantity produced, as well as use the computed costs to determine a minimum cost output level for that business. In addition, you will compute both the break-even price and the shutdown price for a hypothetical business in a perfectly competitive market, determine if that business would incur an economic profit at various market prices, and if the business should continue to produce at each of those price levels. In addition, you will also clearly explain how the average total cost of a new output level is affected by its share of fixed costs and variable costs.
Using the Word template provided in the Minimum Submission Requirements, answer the following questions based on the situation.
Table 1 shows an LED light bulb manufacturer’s total cost of producing LED light bulbs.
|Cases of LED light bulbs produced in an hour||Total Cost|
1. What is this manufacturer’s fixed cost? Explain why.
2. Assuming that you only know the total costs (TC) (as is shown in the Table 1 above) explain how you would calculate each of the following:
a. Variable Cost (VC);
b. Average Variable Cost (AVC);
c. Average Total Cost (ATC);
d. Average Fixed Cost (AFC); and,
e. Marginal Costs (of a single case).
3. In Table 2, for each level of output, insert the following values into the table:
a. the Variable Cost (VC);
b. the Average Variable Cost (AVC);
c. the Average Total Cost (ATC); and,
d. the Average Fixed Cost (AFC).
|Cases of LED light bulbs produced in an hour||Total Cost||Variable Costs||Average Variable Costs||Average Total Costs||Average Fixed Cost|
e. Given the information you computed in Table 2, what is the minimum cost output level? Explain why.
4. Brenda Smith operates her own farm raising chickens and producing eggs. She sells her eggs at the local farmers market where there are several other egg producers also selling eggs by the dozen. (Brenda operates in a perfectly competitive market in which she is a “price taker.”) In order to make sure she does not lose money on selling eggs, she does an analysis of her costs for producing eggs as shown on Table 3.
|Dozens of eggs||Fixed Cost||Total Cost||Variable Costs||Average Variable Costs per dozen||Average Total Costs per dozen|
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