Problem 1
Choco Delite is a manufacturer of fine chocolates. Its monthly rental expense is $1,000,000. It also has $2 million in fixed labor costs. Its marginal costs are $.70 per chocolate bar.
• If sales fall by 30 percent from 2 million chocolate bars per month to 1,400,000 chocolate bars per month, what happens to the AFC per chocolate bar?
• The MC per chocolate bar?
• What about the minimum amount that can be charged to break even on these costs?
Hint: Here Marginal Cost (MC) is constant, which implies that Average Variable Cost (AVC) is constant and equals MC. This does not imply Average Total Cost (ATC) is constant or has to equal MC. Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC). Divide through by the quantity Q, which implies TC/Q = FC/Q + VC/Q. This gives us ATC = AFC + AVC.
Problem 2
Assume that the cost data in this table are for a purely competitive producer:
|
Total Product
|
Average Fixed Cost
|
Average Variable Cost
|
Average Total Cost
|
Marginal Cost
|
|
0
|
|
|
|
10
|
|
1
|
$25.00
|
$10.00
|
$35.00
|
6
|
|
2
|
12.50
|
8.00
|
20.50
|
4
|
|
3
|
8.33
|
6.67
|
13.00
|
4
|
|
4
|
6.25
|
5.50
|
11.75
|
2
|
|
5
|
5.00
|
4.80
|
9.80
|
3
|
|
6
|
4.17
|
4.50
|
8.67
|
5
|
|
7
|
3.57
|
4.57
|
8.14
|
8
|
|
8
|
3.13
|
5.00
|
8.13
|
14
|
|
9
|
2.78
|
6.00
|
8.76
|
21
|
|
10
|
2.50
|
7.50
|
10.00
|
|
• How much economic profit can be achieved at each level of output? If price is $10.00 how much will be produced in the short run?
• Using the price of $4 to answer the previous questions.
• Using the price of $14 to answer the previous questions.
Problem 3
Assume that a purely competitive firm is selling 2000 television sets a day at a cost of $90,000. Also assume that the firm sells 1600 units per day, its total cost would be $60,000, and if it sold 1000 units per day, it would have a total cost of $55,000.
• Calculate the Average Total Cost at these different sales levels.
• Assuming that the cost structure for every firm in the industry were identical, do you think that the industry could be in long run equilibrium?
• If the industry is perfectly competitive, what would be the long run equilibrium price? If that price is the market price and every firm in the industry is earning a normal profit of 15%, what would be the profit?