Calculating the types of costs

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Question 1. Mariam has decided to use her catering skills and start a vegetarian lunch business, she is operating in a competitive market and has the production costs given in the table below.

a. Complete the table by calculating the total cost, the average variable cost, the average total cost and the marginal cost for each quantity of output. [4 marks]

b. What is Mariam’s break-even price? What is Mariam’s shut-down price? Why? [2 marks]

c. If the market price is $21 per meal, will Mariam produce in the short run? Will she make a profit or loss? Explain. [2 marks]

d. If the market price is $17 per meal, will Mariam produce in the short run? Will she make a profit or loss? Explain. [2 marks]

e. If the market price is $13 per meal, will Mariam produce in the short run? Will she make a profit or loss? Explain. [2 marks]

f. Do you completely agree with the statement: “A firm’s supply curve is its marginal cost curve.”? Explain why or why not. [2 marks]

Total Quantity of Lunches (Q) Total Variable Cost Total Fixed Cost Total Cost Marginal Cost

 

Average Variable Cost Average Total Cost
0 $0 $100  

     
10 200    

 

 

 

20 300    

 

 

 

30 480    

 

 

 

40 700    

 

 

 

50 1,000    

 

 

 

Question 2. Jinfeng operates a book printing company in a competitive market structure which is currently in long-run equilibrium.

a. Draw, and carefully label all relevant points, depicting the market and a typical firm operating in this market which is in long-run equilibrium. [ 6 marks]

b. Jinfeng is very creative and develops a new technology which significantly reduces the variable costs of printing books. What will happen to Jinfeng’s profits and the price of books in the short run if he is able to prevent other firms from using this cost-saving technology?

Explain with words and illustrate the outcome with the use of an appropriate diagram. [6 marks]

c. What happens in the long-run to price and profits if Jinfeng is no longer able to prevent his competitors from adopting the same cost-saving technology? Explain what will happen to price, quantity and profit. [4 marks]

Question 3. Kayla started up a micro-brewery last fall and has hired Mason Consultants to help determine how she can main her current level of output while minimizing costs. The consulting company has determined an additional person-hour of labour would increase beer output by 2,000 litres per day. Adding an additional machine-hour of fermentation capacity would increase output by 400 litres per day. The hourly wage rate is $20 while the price of a machine-hour of fermentation capacity is $0.50 per hour. What recommendations do you think Mason Consultants made to Kayla to lower her costs? [2 marks]

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