Unit 8 Assignment: Cost Analysis and the Perfectly Competitive Market
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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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Questions
1. The Gulf Sea Turtle Conservation Group (GSTCG), a non–profit group of volunteers working to collect data on nesting sea turtles and to promote sea turtle conservation, is considering creating a video to educate people about sea turtle conservation. The cost of duplicating a video on a DVD and mailing the DVD is $5.56. In a GSTCG member meeting, the video plan was discussed.
The first two columns of Table 1 below shows the expected demand for the DVD at different suggested donation levels, and they can act as a single-price monopolist if they choose to. The receipts will be used to fund GSTCG supplies for their data collection and conservation work. At the end of each sea turtle nesting season, any excess funds are donated by the GSTCG to a local non-profit sea turtle research and rehabilitation facility.
a. Complete Table 1 by computing the Total Revenue, Marginal Revenue, Total Cost, and Profit columns, each rounded to two decimal places. The cost of duplicating a video on a DVD and mailing the DVD, the Marginal Cost, is $5.56. (1 point)
Table 1
Suggested Donation per DVD Request Anticipated Number of DVD Requests Total Revenue Marginal Revenue Total Cost Profit
$19.00 0
$15.00 2
$9.50 5
$7.75 9
$3.00 15
$0.00 24
b. The President wants the GSTCG to provide videos to generate the most possible donations (Total Revenue). What price is the President of the GSTCG favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers. (1 point)
c. The Education Outreach Committee wants the GSTCG to provide videos to the most possible number of people. What price is the Educational Outreach Committee favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers. (1 point)
d. The Treasurer of the GSTCG wants the DVD program to be as efficient as possible so that the marginal revenue equals marginal cost. What price is the Treasurer favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers. (1 point)
e. The Fundraising Committee wants the DVD program to generate as much profit in donations as possible. What price is the Fundraising Committee favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers. (1 point)
2. Imagine an Island a short distance off the east coast of a country. This island is called Onus, and it has a population of about 500 residents. Their only way to the mainland is by the ONE ferry boat that runs between Onus and the mainland (the ferry operates as a monopoly).
Similarly, a short distance off the west coast of the same country is another island, Yuri, with a similar population of about 500 residents. Yuri, however, is a tourist attraction. There are MANY ferry boats running between Yuri and the mainland (each ferry operating in this perfectly competitive market). Each Yuri ferry operator provides service to both the tourists and to the 500 west coast island residents.
Using the information that you learned in Chapter 13 of the text, answer the following questions by comparing and contrasting the differences between the monopoly market in Onus and the perfectly competitive market in Yuri.
a. Explain in detail what differences in demand that the monopoly ferry operator on the east coast island of Onus will experience compared to the demand that a single ferry operator will experience in the perfectly competitive west coast market of Yuri. (2 points)
b. Both the Onus ferry operator in the monopoly market and each of the Yuri ferry operators in the perfectly competitive market will want to produce at the point that the marginal revenue is equal to the marginal cost. Explain in detail the two reasons that the monopoly’s marginal revenue will always be less than its price while the marginal revenue in the perfectly competitive market will always be equal to the market price. (2 points)
c. Explain in detail how the monopoly ferry operator will determine the quantity of ferry service that she will provide to the 500 residents of Onus. Also explain how that monopoly quantity will compare to the total quantity of ferry service available to the 500 residents of the perfectly competitive market of Yuri by ALL the Yuri ferry providers. (2 points)
d. Explain in detail how the monopoly ferry operator in Onus will determine the price she will charge the island residents for ferry service and how that price will differ from the price experienced by the island residents and tourists in the perfectly competitive market of Yuri. (2 points)
3. Onus residents, in questions 2.a.–d. above, complain to their local politicians about the high prices. In an attempt to reduce the exorbitant price that the residents must pay for ferry service to and from the mainland, the local politicians convince the legislature to create a regulatory board which will impose a legal price ceiling on the Onus monopoly ferry operator.
a. In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be below the ferry operator’s lowest ATC, but well above its lowest AVC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the island of Onus. (4 points)
b. In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be well above the ferry owner’s lowest AVC and equal to the ferry owner’s lowest ATC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the island of Onus. (3 points)
c. In this scenario, the regulatory board, imposed a price ceiling on the Onus ferry operator that was calculated to be well above the ferry owner’s lowest AVC and well above the ferry owner’s lowest ATC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the east coast island of Onus. (4 points)