1. Alice's Wearhouse company has fixed costs of $7,000 and its variable costs for a range of output levels are shown in the table below. Calculate total cost, average cost, marginal cost, and average variable cost for the different quantities of output shown. (Hint: Add those costs to the table under the appropriate section you create.) 4 points
|
Quantity
|
Variable Cost
|
|
0
|
0
|
|
100
|
$500
|
|
200
|
$1,000
|
|
300
|
$3,000
|
|
400
|
$7,000
|
|
500
|
$14,000
|
|
600
|
$24,000
|
Based on your answers to Alice's Wearhouse, imagine a situation where a firm produces a quantity of 300 and that good sells at a price of $50 each.
What will be the company's profits or losses?
How can you tell at a glance whether the company is making or losing money at this price just by looking at average cost?
At the given quantity and price, is the marginal unit produced adding to profits?
2. Answer the following questions briefly, based on your understanding of the common shapes of cost curves. (4 points)
Where will the marginal cost curve cross the average cost curve? Why?
Will the total cost curve tend to flatten out or to slope up more steeply on the right? Why?
Why are total costs and marginal costs not usually shown on the same graph together?
What are the underlying economic reasons that short-run average cost typically slope down then up?
Will average variable costs usually be above or below average cost? Or will it sometimes be on and sometimes the other? Explain.
Will the marginal cost curve tend to slope up or down? Why?
Why are average costs and fixed costs typically not shown on the same graph together?
How can you tell the level of fixed costs from looking at a total cost curve? What about the level of variable costs?
3. A company shovels sidewalks and driveways, obviously this company would be hurting if they were opened in Elko for this past winter. This company has 100 homes signed up for its services. It can use various combinations of labor and capital: (2 points)
Method 1: 40 units of labor, 10 units of capital (snow shovels)
Method 2: 20 units of labor, 30 units of capital (snow blowers)
Method 3: 10 units of labor, 60 units of capital (snow plow on truck)
The labor costs for the winter are $100/unit and a unit of capital costs $300, what production method should be chosen? What method should be chosen if the cost of labor rises to $200/ unit?