Besanko & Braeutigam – Microeconomics, 3rd edition
Solutions Manual
Chapter 8 Cost Curves
Solutions to Review Questions
1. The long-run total cost curve plots the minimized total cost for each level of output holding input prices fixed. In other words, for a given set of input prices, the long-run total cost curve represents the total cost associated with the solution to the long-run cost minimization problem for each level of output. When the price of one input increases, the isocost line for a particular level of total cost will rotate in toward the origin. Assuming the isocost line was tangent to the isoquant for the firm’s selected level of output, when the isocost line rotates it will no longer touch the original isoquant. In
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Since average fixed cost is always declining, and since average total cost is the vertical sum of average variable and average
9.
Copyright © 2008 John Wiley & Sons, Inc.
Chapter 8 - 2
Besanko & Braeutigam – Microeconomics, 3rd edition
Solutions Manual
fixed costs, average total cost must also be declining at all levels of Q if average variable cost is constant. Graphically, average total cost will be declining and asymptotic to the average variable cost curve. 10. The long-run average cost curve is the envelope to the short-run average cost curves associated with each level of output. If each of these short-run average cost curves has the same minimum point, the long-run average cost curve will be a horizontal line tangent to all of these minimum points. Because the long-run average cost curve will be flat, long-run average cost is neither increasing nor decreasing, and the long-run marginal cost curve will also be flat and equal to long-run average cost. Economies of scale refer to a situation when average total cost for a single product declines as the level of output for that product increases. These economies of scale might occur, for example, because workers can specialize in tasks as the level of output increases and the workers’ productivity may increase. Economies of scope refer to efficiencies that arise when a firm produces more than one product. In particular, economies of scope exist if one firm producing N products
Total contribution needed to cover the old fixed costs + new fixed cost + profit is just the three factors added together.
* If the fixed cost rose to 20% the total margin cost would be $ 87,580 which would be a substantial increase of $16,112 from question 1
Note: You can assume that variable costs are constant so that the average of them is the variable cost relevant for a change in sales.
As Tesco continue to grow, they increase the size of their orders for raw materials. This results in the cost of each individual component purchased will fall. This will therefore reduce the average cost of production.
The Law of diminishing returns states that if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. The total fixed cost is the same regardless of the output; the total variable costs will change with the level of output resulting in the total cost as the sum of the fixed cost and variable cost at each level of output. Over the 0 to 4 range of output, the TVC and TC curves slope upward. They reflect a decreasing rate due to the increasing minor returns. The slopes curves will increase due to these diminishing marginal returns.
If more is produced when it comes to the budget, the fixed cost would be favorable. I believe that the each unit would lower cost when it comes to production in units. But since the total fixed overhead is extended over a huge amount of units, this will cause a lower production in unit. Lastly, it will increase the
They can only produce small batches. Scale economies have brought down the unit costs of production and have fed through to lower prices for consumers. Economies of scale are a key advantage for a business that is able to grow. Most firms find that, as their production output increases, they can achieve lower costs per unit. Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production.
This should allow the company to continue to increase and expand production to meet consumer demand. The available resources and process changes may also alter the learning curve and as the company pursues the learning curve to achieve cost savings volume must increase for the curve to exist. As production time goes on the amount of labor decrease is smaller than when production first started. As you can see from the analysis it took 3,737.7 labor hours to produce the first 5 batches of sandals and only 6101.8 labor hours to produce 4 times as many sandals as the first batch. Continuing production or increasing production should not necessarily increase cost, due to the fact that labor hours will decrease.
net operating income will tend to move up and down in response to changes in levels of production.
In the case of Mendel Paper Company which produces four basic paper products lines at one of its plants: computer paper, napkins, place mats, and poster board. Although the plant superintendent, Marlene Herbert is pleases with increased sales he is also concerned about the costs. The superintendent is concerned with the high fixed cost of production, the increases in fixed overhead and even variable overhead. He feels that the production of place mat should be discontinued. His reason for the discontinuation is that the special printing is driving up the variable overhead to the point where the company may not find it profitable to continue with the line. After reviewing the future predictions of the
The firm's profit maximizing output is less than the output associated with minimum average cost. The firm’s demand curve is not flat but is downward sloping. Thus in the long-run the demand curve will be tangential to the long-run average cost curve at a point to the left of its minimum. The result is excess capacity.”
As an example, if fixed costs are $100, price per unit is $10, and variable costs per unit are $6, then the break-even quantity is 25 ($100 ÷ [$10 − $6] = $100 ÷$4). When 25 units are produced and sold, each of these units will not only have covered its own marginal (variable) costs, but will have also have contributed enough in total to have covered all associated fixed costs. Beyond these 25 units, all fixed costs have been paid, and each unit contributes to profits by the excess of price over variable costs, or the contribution margin. If demand is estimated to be at least 25 units, then the company will not experience a loss. Profits will grow with each unit demanded above this 25-unit break-even level.
Financial results and conditions vary among companies for a number of reasons. One reason for the variation can be traced to the characteristics of the industries in which companies operate. For example, some industries require large investments in property, plant, and equipment (PP&E), while others require very little. In some industries, the competitive productpricing structure permits companies to earn significant profits per sales dollar, while in other industries the product-pricing structure imposes a much lower profit margin. In most low-margin industries, however, companies often experience a relatively high rate of product throughput. A second reason for some of the
complex. The basic objective here is that of taking the cost of expected production operations in the
Even when the demand for an operations products can be reasonably well forecast, the inherent uncertainty in all estimates of future demand may inhibit the business from investing capital to meet the most likely level of demand. Contrastingly, this principle can be linked to the concept of economies of scale. For BCF the addition of one unit of capacity i.e. from the extra capacity provided by the conventional technology option, the total fixed costs per unit of potential production output will decrease. For the new technology option, the addition of one unit of capacity will increase unit costs – a diseconomy of scale. Initially, this claim is based on the capital cost of implementing the new technology option, as well as diseconomies of over using capacity having the effect of increasing unit costs above a certain level of output. As a result, more operations activities