Assignment Week 2

Victoria Berahmandpour Accounting GM545

Assignment Week 2Chapter 7

4. Use the table below to answer the following questions. Assume that fixed costs are $100 and labor is paid $80 per unit (employee).

a. Complete the table.

L Q MP AP TFC TVC TC ATC AVC AFC MC

0 0 0 0 100 0 1001 7 7 7 100 80 180 25.71 11.42 14.29 11.422 15 8 7.5 100 160 260 17.33 10.66 6.7 103 25 10 8.3 100 240 340 13.60 9.6 4 84 40 15 10 100 320 420 8 10.50 2.50 5.335 45 5 9 100 400 500 8.88 11.11 2.22 166 48 3 8 100 480 580 10 12.08 2.08 26.677 50 2 7.14 100 560 660 11.20 13.20 2 40MP = ∆Q/∆LAP = Q/LTFC = TOTAL FIXED COST TVC = TOTAL VARIABLE COSTTC = TFC + TVCATC = TC / QAVC = TVC / QAFC = TFC / QMC = ∆TVC / ∆Q

b. Graph ATC, AVC, AFC, and MC on a piece of graph paper.

0 1 2 3 4 5 6 7 80

5

10

15

20

25

30

35

40

45

ATCAVCAFCMC

11. What is the difference between average total cost and average variable cost?

Average total cost is total cost / units produced and total variable cost is total variable cost / number of units .

12. If marginal cost is less than average total cost, are average total costs rising or falling? Alternatively, if marginal cost is more than average total cost, are average total costs rising or falling? Give an example outside of economics to explain your answer. If MC < ATC ATC is fallingIf MC > ATC ATC is rising

Simple example is gas price if I live in NY the gas price is higher than if I live in south LA.

Chapter 8

1. Use the table below to answer the following questions. Assume that fixed costs are $100 and labor is paid $80 per unit (employee).

a. Complete the table.

L Q MP AP TFC TVC TC ATC AVC AFC MC

0 0 0 0 100 0 1001 7 7 7 100 80 180 25.71 11.42 14.29 11.422 15 8 7.5 100 160 260 17.33 10.66 6.7 103 25 10 8.3 100 240 340 13.60 9.6 4 84 40 15 10 100 320 420 10.50 8 2.50 5.335 45 5 9 100 400 500 11.11 8.9 2.22 166 48 3 8 100 480 580 12.08 10 2.08 26.677 50 2 7.14 100 560 660 13.20 11.2 2 40MP = ∆Q/∆LAP = Q/LTFC = TOTAL FIXED COST TVC = TOTAL VARIABLE COSTTC = TFC + TVCATC = TC / QAVC = TVC / QAFC = TFC / QMC = ∆TVC / ∆Q

b. Graph ATC, AVC, AFC, and MC on a piece of graph paper.

0 1 2 3 4 5 6 7 80

5

10

15

20

25

30

35

40

45

ATCAVCAFCMC

c. Assume the market sets the price at $16 a unit. How much will the firmproduce, and what will its profit equal?

L Q MP AP TFC TVC TC ATC AVC AFC MC5 45 5 9 100 400 500 8.88 8.9 2.22 16

MC = MR = P TR = $16 * 45units produce = $720TP = TR – TC = $720 - $500 = $220

d. Assume now that price falls to $10.50. How much will the firm produce, and what will be its profits?

L Q MP AP TFC TVC TC ATC AVC AFC MC4 40 15 10 100 320 420 10.50 8 2.50 5.33

At price to $10.50, the firm will produce 40 units and TC is 420.TR = 40 * 10.50 = $420TP = 0

e. Now assume that the price falls to $7.50. Again, how much will the firm produce, and what will be its profits?

When the price falls to $7.50, it will be lower than AVC and so, the firm will be shut down.

5. Use the figure on the next page to answer the following true/false questions:

a. If market price is $25 the firm earns economic profits.

True: because price is greater than average total cost.

b. If market price is $20, the firm earns economic profit equal to roughly $100.

False: at price $20, the 100 units produce. Total revenue is $2000 At 100 units, average total cost is around $1600 (16 * 100) Total profit is $400

c. If market price is $9, the firm will produce roughly 55 units.

False: at this point the business will be closed because the price is less than of AVC.

d. If market price is $12.50, the firm will produce roughly 70 units and make an economic loss equal to roughly $175.

True: at price $12.50, the firm will produce 70 units and AVC at 70 is around $10.00 so, the difference is 2.50 which is loss (2.50 * 70 = $175).

e. Total fixed costs for this firm are roughly $100.

False: TFC = AFC * Q. The actual graph doesn’t show the line for TFC, however, we can see that ATC is adding AVC and AFC. So, the graph for example at price of $10 the output is almost 70 and 70 * 10 = $700.

f. If market price is $15, the firm sells 80 units and makes a normal profit.

True: at price $15 is the lowest point of ATC and almost cross MC at the 80 units produce at that price.

6. Why do competitive firms sell their products only at market price? Why not try to raise prices to make more profit or lower them to garner market share (more sales)?

Because, if they sell their product less they make less and if they sell raise the price they will lose their business to the competitiors.