Implicit and Explicit Costs: Economic Problems
Problem A
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.
1. 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 average fixed cost (AFC) per chocolate bar?
2. What happens to the marginal cost (MC) per chocolate bar?
3. What about the minimum amount that can be charged to break even on these costs?
Problem B
Assume that the cost data in the table below are for a purely competitive producer:
|
Cost Data
|
|
Total Product
|
Average Fixed Cost
|
Average Variable Cost
|
Average Total Cost
|
Marginal Cost
|
Price
|
Price-ATC
|
|
0
|
|
|
|
|
|
|
|
1
|
$25.00
|
$10.00
|
$35.00
|
$10.00
|
|
|
|
2
|
12.50
|
8.00
|
20.50
|
6.00
|
|
|
|
3
|
8.33
|
6.67
|
13.00
|
4.00
|
|
|
|
4
|
6.25
|
5.50
|
11.75
|
2.00
|
|
|
|
5
|
5.00
|
4.80
|
9.80
|
2.00
|
|
|
|
6
|
4.17
|
4.50
|
8.67
|
3.00
|
|
|
|
7
|
3.57
|
4.57
|
8.14
|
5.00
|
|
|
|
8
|
3.13
|
5.00
|
8.13
|
8.00
|
|
|
|
9
|
2.78
|
6.00
|
8.76
|
14.00
|
|
|
|
10
|
2.50
|
7.50
|
10.00
|
21.00
|
|
|
Respond to the following:
1. 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?
2. Using the price of $4, answer the previous questions.
3. Using the price of $14, answer the previous questions.
Problem C
Assume that a purely competitive firm is selling 2,000 television sets a day at a cost of $90,000. Assume that if the firm sells 1,600 units per day, its total cost would be $60,000, and if it sold 1,000 units per day, it would have a total cost of $55,000.
1. Calculate the average total cost at these different sales levels.
2. Assuming that the cost structure for every firm in the industry is identical, do you think that the industry could be in long-run equilibrium?
3. If the industry is perfectly competitive, what would be the long-run equilibrium market price?
4. 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?
Problem D
1. If a hypothetical company has revenues less than its cost, should it shut down?
2. If the company decides to shut down, is that decision final?
3. Provide a real-world example to support your answer.
Resources
• Gean, F., & Gean, V. (2015). The desirability of an integrated learning methodology for enriching CVP analysis. Journal of Business & Accounting, 8(1), 127-137.
• McAfee, P. R. (n.d.). Introduction to economic analysis. Retrieved from https://www.mcafee.cc/Introecon/IEA.pdf
• Ahleresten, K. (2008). Essentials of microeconomics. London, GBR: Bookboon.