Unit 8 [224 Assignment Template]
Unit 8 Assignment: Cost Analysis and the Perfectly Competitive Market
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NOTE:
Before attempting to complete this Assignment, it is strongly recommended that you complete the Learning Activity associated with this Assignment. The link to the Learning Activity is found within the course by selecting on “Content”, then on “Unit 8”, then on “Assignment”, and then on “Unit 8 Assignment.” The link appears within the paragraph entitled “Learning Activity.”
In this Assignment, you will be assessed on the following outcomes:
BU224-3: 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.
Assignment
In this Assignment, you will define and calculate the remaining six major cost elements of a business, when given the Total Costs and the Quantity Produced, as well as to 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.
Questions
Table 2.a. shows an LED light bulb manufacturer’s total cost of producing LED light bulbs.
Table 2.a.
Cases of LED light bulbs produced in an hour | Total Cost |
0 | $4,500 |
10 | $4,900 |
20 | $5,100 |
30 | $5,300 |
40 | $5,400 |
50 | $5,700 |
60 | $6,700 |
70 | $7,900 |
80 | $9,700 |
90 | $11,800 |
1. What is this manufacturer’s fixed cost? Explain why. (1 point)
2. Assuming that you only know the Total Costs (TC) (as is shown in the Table 2.a. above) explain how you would calculate each of the following:
a. Variable Cost (VC) (1 point);
b. Average Variable Cost (AVC (1 point));
c. Average Total Cost (ATC) (1 point);
d. Average Fixed Cost (AFC) (1 point) ; and,
e. Marginal Costs (of a single case). (1 point)
3. In Table 3.a., for each level of output, insert into the table the values for:
a. the Variable Cost (VC);
b. the Average Variable Cost (AVC);
c. the Average Total Cost (ATC); and,
d. the Average Fixed Cost (AFC).
Table 3.a.
Cases of LED light bulbs produced in an hour | Total Cost | Variable Costs
(3 points) a. |
Average Variable Costs
(3 points) b. |
Average Total Costs
(3 points) c. |
Average Fixed Cost
(3 points) d. |
0 | $4,500 | n/a | n/a | n/a | |
10 | $4,900 | ||||
20 | $5,100 | ||||
30 | $5,300 | ||||
40 | $5,400 | ||||
50 | $5,700 | ||||
60 | $6,700 | ||||
70 | $7,900 | ||||
80 | $9,700 | ||||
90 | $11,800 |
e. Given the information you computed in Table 3.a., what is the minimum cost output level? Explain why. (5 points)
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 4.a.
Table 4.a.
Dozens of eggs | Fixed Cost | Total Cost | Variable Costs | Average Variable Costs per dozen | Average Total Costs per dozen |
0 | $3.35 | $3.35 | n/a | n/a | n/a |
10 | $3.35 | $10.50 | $7.15 | $0.72 | $1.05 |
20 | $3.35 | $16.40 | $13.05 | $0.65 | $0.82 |
30 | $3.35 | $23.10 | $19.75 | $0.66 | $0.77 |
40 | $3.35 | $30.00 | $26.65 | $0.67 | $0.75 |
50 | $3.35 | $36.50 | $33.15 | $0.66 | $0.73 |
60 | $3.35 | $48.00 | $44.65 | $0.74 | $0.80 |
70 | $3.35 | $64.40 | $61.05 | $0.87 | $0.92 |
80 | $3.35 | $80.00 | $76.65 | $0.96 | $1.00 |
90 | $3.35 | $135.00 | $131.65 | $1.46 | $1.50 |
a. What is Brenda’s break-even price for a dozen of eggs? Explain how you found that answer. (6 points)
b. What is Brenda’s shut-down price for a dozen of eggs? Explain how you found that answer. (6 points)
c. If the market price of a dozen eggs at the local farmers market is $1.45 per dozen, will Brenda make an economic profit? Explain how you determined your answer. (4 points)
d. If the market price of a dozen eggs at the local farmers market is $1.45 per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer. (4 points)
e. If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer. (4 points)
f. If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer. (6 points)
g. If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer. (5 points)
h. If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer. (6 points)
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References:
Unit 8 Assignment: Cost Analysis and the Perfectly Competitive Market | Possible Points | Points Earned |
Overall Writing: | 8 | |
Used correct file name in uploading assignment document. | 1 | |
Demonstrated concerted effort to utilize material from the textbook, Learning Activities, and/or seminars to answer questions. | 3 | |
Correctly formatted in-text citations and listed at least ONE reference. | 3 | |
Used standard English with few or no grammatical errors. | 1 | |
Individual Questions: | 72 | |
1. Correctly explained the calculation of fixed cost. | 2 | |
2.a. Correctly explained the calculation of variable cost. | 2 | |
2.b. Correctly explained the calculation of average variable cost. | 2 | |
2.c. Correctly explained the calculation of average total cost. | 2 | |
2.d. Correctly explained the calculation of average fixed cost | 2 | |
2.e. Correctly explained the calculation of marginal cost | 2 | |
3.a. Correctly calculated variable cost. | 4 | |
3.b. Correctly calculated average variable cost. | 4 | |
3.c. Correctly calculated average total cost. | 4 | |
3.d. Correctly calculated average fixed cost | 4 | |
3.e. Correctly Identified the minimum cost output level. | 4 | |
4.a. Correctly determined the break-even price. | 6 | |
4.b. Correctly determined the shutdown price. | 6 | |
4.c. Correctly determined if economic profit at $1.45. | 4 | |
4.d. Correctly determined if continue producing at $1.45. | 4 | |
4.e. Correctly determined if economic profit at 72 cents. | 4 | |
4.f. determined if continue producing at 72 cents. | 6 | |
4.g. Correctly determined if economic profit at 64 cents. | 4 | |
4.h. Correctly determined if continue producing at 64 cents. | 6 | |
Less points deducted for late submission | ||
Total Points | 80 |