CAS EC 101 Lecture Notes - Lecture 7: Form 10-Q, Marginal Cost, Fixed Cost

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CHAPTER 11: PRODUCER THEORY

Objective 1: Total, Average and Marginal Costs

• Total Cost (TC) – the total cost of producing q units of output

o ex: TC = 10q (simplistic)

▪ Results in an upwards sloping line on a graph

o However, this is not descriptive of most firms’ cost situation

o ex: TC = q3 + 2q3 + 3q + 5 (complex and more realistic)

▪ Results in a cubic sloping line on a graph

▪ Costs initially rise steeply, level off, then continue to rise steeply

• Average Cost (AC) – the average cost at any given output (q)

o Formula = 



o ex: go from TC to AC for a simplistic TC

▪ TC = 10q, AC = 10q/q = 10

▪ Results in a horizontal line on a graph

o ex: go from TC to AC for a realistic TC

▪ TC = TC = q3 + 2q3 + 3q + 5, AC = q2 + 2q + 3

▪ Results in a parabolic shaped graph

• Marginal Cost (MC) – the cost of producing an additional unit of output

o Formula = 

 = 



o ex: go from TC to MC for a realistic TC

▪ TC = 10Q, MC = 10q/q = 10

▪ Results in a horizontal line on a graph

o ex: go from TC to MC for a realistic TC

▪ TC = q3 + 2q3 + 3q + 5

▪ MC = 3q2 + 4q + 3

▪ Results in a fishhook shaped graph

• Relationship Between MC and AC

• The marginal value will always pull the average value in the direction it is going

o When the marginal cost is less than average cost, the average cost will be

declining (on a graph)

▪ This holds true even if average cost is rising

o When the marginal cost is equal to the average cost, the average cost will

remain flat (on a graph)

▪ Minimum Average Cost – when the average cost is at its lowest

▪ Will always be a singular point

o When the marginal cost is higher than average cost, the average cost will be

rising (on a graph)

Objective 2: Fixed and Variable Costs

• Total Cost = Total Fixed Costs + Total Variable Cost

o Total Fixed Costs (TFC) – costs that do not vary due to output (q)

▪ Essentially the costs that firms’ must pay even when they are not

producing goods

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▪ ex: go from TC to TFC for a realistic TC

• TC = q3 + 2q3 + 3q + 5, TFC = 5

• Results in a graph with a distinct vertical intercept

▪ Important to note that TFC = TC when q is 0

o Total Variable Costs (TVC) – costs that do vary due to output (q)

▪ ex: go from TC to TVC for a realistic TC

• TC = q3 + 2q3 + 3q + 5, TVC = q3 + 2q3 + 3q

• Results in a graph with no vertical intercept (no starting output,

line will begin at 0)

• Average Cost = Average Fixed Costs (AFC) + Average Variable Costs (AVC)

o If q Increases – AFC decreases (away from AC), AVC increases (towards AC)

o If q Decreases – AFC increases (towards from AC), AVC decreases (away from

AC)

• Marginal Cost = Marginal Fixed Costs + Marginal Variable Costs

o Marginal Fixed Costs (MFC) – will always equal zero

o So: Marginal Cost = 0 + Marginal Variable Costs

o Marginal Cost = Marginal Variable Costs

Objective 3: Summary of Costs

Total

Fixed

Variable

Total

TFC

TVC

Average

AC = TC/q

AFC = TFC/q

AVC = TVC/q

Marginal

MC = TC/q

MFC = TFC/q = 0

MVC = TVC/q = MC

• ex: find the AC, AFC, AVC and MC

o TFC = 6 at every level of output

o q – given

o TC – given

o AC – 



o AFC – 



o AVC – AC – AFC

o MC – 



o TFC – when q = 0, TC = 6

AFC

AVC

TFC

4.5

1.5

3.67

2.67

3.5

1.5

3.6

1.2

2.4

3.83

2.83

Objective 4: Revenue Concepts

• Total Revenue (TR) – the total revenue from producing q

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o Formula = p x q, with p = the price per unit and q = the quantity of units sold

o ex: a gas station sells 1000 gallons of gas at $3 per gallon

▪ TR = 1,000 x $3 = $3,000

• Average Revenue (AR) – the average revenue a firm will make

o Formula = 

 = 

 = p

o Essentially, average revenue is the price

• Marginal Revenue (MR) – the additional revenue from selling the last unit

o Formula = 

 = 



o ex: the 110th widget is sold for $40, so delta TR = 40 and delta q = 1

▪ MR = 40/1 = 40

Objective 5: Perfectly Competitive Firm

• How is price determined?

• Market v. Firm

• Market – how many firms are in the market and how do they compete

o There will be a very large number of firms which prevents any single firm from

affecting price (ex: setting or changing prices)

o They determine price based on the market given price (which is determined by the

intersection of supply and demand)

▪ This results in firms being able to sell as much as they can produce

▪ But this means they can only sell as much as they produce

o Results in a graph with the supply and demand curves intersecting at the market

determined price (P*)

• Firm – must take and use the market determined price (P*)

o Results in a graph with a flat line (perfectly elastic) representing the market

determined price (P*)

o P* = Demand = Average Revenue = Marginal Revenue

• ex: what would happen if an individual firm tried to raise its price?

o They would sell zero products as buyers would consume goods from other firms

selling at the lower market determined price

• ex: what would happen if an individual firm tried to lower its price?

o They would continue to sell the same amount of product (would not make more or

less revenue)

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CAS EC 101 Full Course Notes

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Ac: marginal cost = marginal fixed costs + marginal variable costs, marginal fixed costs (mfc) will always equal zero, so: marginal cost = 0 + marginal variable costs, marginal cost = marginal variable costs. Marginal mc = tc/ q mfc = tfc/ q = 0 mvc = tvc/ q = mc: ex: find the ac, afc, avc and mc. Tvc: tfc = 6 at every level of output, q given, tc given, ac (cid:3044, afc (cid:3044, mc (cid:3044, avc ac afc, tfc when q = 0, tc = 6. = p: essentially, average revenue is the price, formula = (cid:3019)(cid:3044) = (cid:4666)(cid:3043) (cid:3044)(cid:4667)(cid:3044, formula = (cid:3019) (cid:3018) = c(cid:2918)a(cid:2924)(cid:2917)e (cid:2919)(cid:2924) (cid:2930)(cid:2925)(cid:2930)al (cid:2928)e(cid:2932)e(cid:2924)(cid:2931)e c(cid:2918)a(cid:2924)(cid:2917)e (cid:2919)(cid:2924) (cid:2930)(cid:2925)(cid:2930)al (cid:2925)(cid:2931)(cid:2930)(cid:2926)(cid:2931)(cid:2930, mr = 40/1 = 40. In the short run, a firm has fixed costs. In the long run, a firm has variable costs. Objective 9: firms" supply curve market supply curve.

Related Questions

Please If you can highlight or mark the correct answer

Activity : 2 point(s)

If P = $8 and MC = $5 + 0. 2Q, the competitive firm's profit-maximizing level of output is:

0.2

Activity : 2 point(s)

In the long run, firms will exit a perfectly competitive industry if:

excess profits exceed zero.

excess profits are less than zero.

total profit equals zero.

excess profits equal zero.

Activity : 2 point(s)

In long-run equilibrium, monopoly prices are set at a level where:

price exceeds marginal revenue.

industry demand equals industry supply.

industry demand is less than industry supply.

price exceeds average revenue.

Activity : 1 point(s)

The kinked demand curve theory of oligopoly assumes that rival firms:

react to price increases.

react to price increases and decreases.

do not react to price changes.

react to price decreases.

Activity : 1 point(s)

In oligopoly markets, the market demand curve is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 2 point(s)

The level of competition in a given market tends to increase if:

minimum efficient scale of firms increases.

the number of substitutes increases.

significant barriers to exit are imposed.

the number of potential entrants decreases.

Activity : 2 point(s)

In the short run, the:

firm has complete flexibility with respect to input use.

availability of all inputs is fixed.

operating period is longer than the planning period.

availability of at least one input is fixed.

Activity : 1 point(s)

In both monopolistic competition and oligopoly markets:

there is easy entry and exit.

consumers perceive differences among the products of various competitors.

economic profits may be earned in the long run.

there are many sellers.

Activity : 1 point(s)

In oligopoly equilibrium:

MC = AC

MC > AC

MR = MC

MC < AC

Activity : 2 point(s)

A firm will earn normal profits when price:

equals average total cost.

equals average variable cost.

equals marginal cost.

exceeds minimum average total cost.

Activity : 2 point(s)

Economic costs include both explicit and implicit cost. When analyzing costs the next-best use of a given asset is called:

current cost.

replacement cost.

historical cost

opportunity cost.

Activity : 2 point(s)

In a perfectly competitive market:

sellers and buyers have perfect information.

entry and exit are difficult.

c. sellers produce similar, but not identical products.

each seller can affect the market price by changing output.

Activity : 2 point(s)

In competitive market equilibrium, the firm's:

MR = MC and P > AR

MR = MC and P > AC

AR = AC and MR > MC

P = MR = AR = AC = MC

Activity : 1 point(s)

A firm should increase advertising if the net marginal revenue derived is:

equal to the marginal cost of advertising.

greater than the marginal cost of advertising.

greater than zero.

less than the marginal cost of advertising.

Activity : 2 point(s)

For a firm in perfectly competitive market equilibrium:

a replacement cost.

an implicit cost.

an explicit cost.

an opportunity cost.

Activity : 1 point(s)

In a monopolistically competitive industry, firms:

offer products that are not perfect substitutes.

make decisions in light of expected reactions from other firms.

set price equal to marginal cost.

are price takers.

Activity : 2 point(s)

Fixed costs include:

variable labor expenses.

output-related energy costs.

output-related raw material costs.

variable interest costs for borrowed capital.

Activity : 2 point(s)

A monopolist maximizes profits by producing a level of output when:

P = AC

P > MC

P < MC

P = MC

Activity : 2 point(s)

The demand curve for a unique product without substitutes is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 2 point(s)

At the point of minimum Average Variable Cost:

historical cost.

incremental cost.

current cost.

Activity : 2 point(s)

In the decision process, management should ignore:

implicit costs.

historical costs.

sunk costs.

incremental costs.

Activity : 1 point(s)

At the profit maximizing level of output for a monopolist:

P = AR and AR = AC

P = MC and MR > MC

P = MR and AC = MC

P > MC and MR = MC

Activity : 2 point(s)

In perfectly competitive markets, profits are maximized when:

MC=AC

P>AC

MR=MC

MR=P

Activity : 2 point(s)

Graphically, competitive market supply is measured by the:

vertical difference of competitor demand curves.

vertical sum of competitor demand curves.

horizontal difference of competitor MC curves.

horizontal sum of competitor MC curves.

Activity : 2 point(s)

For a firm in perfectly competitive market equilibrium:

MR < AR

P > AC

P > MR

P = MC

Activity : 2 point(s)

In the long run, firms will offer supply at the point where P = MR = MC if:

MC is rising.

MC is falling.

MC is constant.

P > AC

Activity : 2 point(s)

The firm demand curve in a competitive market is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 1 point(s)

Monopolistic competition is characterized by:

homogeneous products.

barriers to entry and exit.

perfect dissemination of information.

few buyers and sellers.

Activity : 2 point(s)

Marginal cost equals:

average variable cost at its maximum point.

the change in total fixed cost divided by the change in quantity.

the change in total variable cost divided by the change in quantity.

total cost divided by quantity.

Activity : 2 point(s)

In the short run, a perfectly competitive firm will shut down and produce nothing if:

excess profits equal zero.

total cost exceeds total revenue.

total variable cost exceeds total revenue.

the market price falls below the minimum average total cost.

Activity : 2 point(s)

For a monopoly in equilibrium:

MR = MC

MC â¤ AC

MR â¤ AC

P â¥ AC

Activity : 2 point(s)

When profits are maximized in a competitive market, average cost is always:

rising.

falling.

constant.

none of these.

Activity : 2 point(s)

So long as P > AVC, the competitive firm's short-run supply curve is equal to:

AVC

none of these.

Activity : 1 point(s)

The four-firm concentration ratio will rise following:

a rise in imports.

a fall in imports.

a merger between the two largest firms in the industry.

small firm entry.

Activity : 2 point(s)

In oligopoly markets, the market demand curve is:

point on the short-run marginal cost curve.

short-run average cost of production.

long-run average cost of production.

point on the short-run average cost curve.

Activity : 2 point(s)

The following market cannot be described as perfectly competitive:

the unskilled labor market.

the milk market.

discount retailing.

the agricultural grain markets.

Activity : 2 point(s)

In the long run, the:

availability of at least one input is fixed.

firm's operating decisions are typically constrained by prior capital expenditures.

availability of all but one input is fixed.

firm has complete flexibility with respect to input use.

Activity : 1 point(s)

The industry supply curve is derived through the horizontal summation of firm:

average cost curves.

marginal revenue curves.

marginal cost curves.

demand curves.

Activity : 2 point(s)

Price and product quality competition tends to be vigorous when:

entry barriers are low.

potential entrants are few.

product quality information is scarce.

the number of active sellers is few.

Activity : 1 point(s)

A perfectly functioning cartel results in:

oligopoly.

monopoly.

perfect competition.

monopolistic competition.

Activity : 1 point(s)

When prices in monopolistically competitive markets exceed those in a perfectly competitive equilibrium, this difference is the cost of:

information.

market power.

inefficiency.

product differentiation.

Activity : 1 point(s)

In the short run, a monopolist will:

shut down if price equals average total cost.

shut down if price is less than average total cost.

shut down if price is less than average variable cost.

never shut down.

Activity : 2 point(s)

In the short run, a perfectly competitive firm will shut down and produce nothing if:

typically involve multiple units of output.

do not vary across decision alternatives.

come into play when judging the costs of adding a new product line, advertising campaign, production shift, or organization structure.

play a role in determining the optimal course of action.

Activity : 2 point(s)

At the point of minimum AVC:

MC is falling.

MC is constant.

MC is rising.

MC = AVC.

Activity : 2 point(s)

A monopsony is a market with:

many sellers.

one buyer.

many buyers.

one seller.

Activity : 1 point(s)

The demand curve faced by a firm in a monopolistically competitive industry is:

the downward sloping industry demand curve.

downward sloping.

more elastic than the perfectly competitive firm's demand curve.

horizontal.

Activity : 2 point(s)

Perfect competition always prevails in markets with:

few buyers and sellers.

many buyers and sellers.

an even balance of power between sellers and buyers.

a single buyer.

Activity : 2 point(s)

If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:

constant returns to scale.

decreasing returns to scale.

decreasing returns to a factor input.

increasing returns to scale.

Activity : 2 point(s)

Average cost declines as output expands in a production process with:

constant returns to scale.

decreasing returns to scale.

decreasing returns to a factor input.

increasing returns to scale.

Activity : 2 point(s)

If the productivity of variable factors is decreasing in the short-run:

marginal cost must increase as output increases.

average cost must decrease as output increases.

average cost must increase as output increases.

marginal cost must decrease as output increases.

1. Suppose that a perfectly competitive firm's Total Cost function is given by:
TC = 50 + 80q - 10q² + 0.6q³
a. What is fixed cost equal to? What is Variable Cost equal to?
b. What is Marginal Cost equal to? What is the Average Variable Cost equal to?
c. Find an equation for the inverse supply curve of the firm. Hint: the supply curve presumes profit-maximizing outputs at any market price.
d. Below which market price (a number) will this firm choose to produce 0 output?
e. Choose a market price that is between Average Cost and Average Variable Cost. Will, the firm choose to produce a positive output level?
Depict this output level in a graph that includes all the
appropriate curves. Explain verbally (and with numbers) why this firm would choose to produce the output you chose.
f. What does it mean for a firm to be a price taker? What is the
implication of this for the individual firm's demand curve? You must also mention in your answer the term elasticity (correctly of course).
g. If the firm's cost curve shifted down, what would this do to?
the firm's supply curve? Justify your answer with an example using the short-run total cost curve above.
Q2. Suppose there are two demand curves (e.g two different sets of consumers) for a particular product (two distinct markets that can be segmented-so somehow the consumers in one market cannot buy in the other market and resale from lower-priced consumers to higher-priced consumers is not possible).
The two demand curves are given by the following equations:
Q1 = 14 - P1 (group 1)
Q2 = 12 - 2P2 (group 2)
a. Solve for the inverse demand curve for group 1 and then graph the inverse demand curve with P on the vertical and Q on the horizontal axis.
b. Calculate MR for each group above and graph on the graphs in part a.
c. Suppose MC=AC is constant and equal to 2 for the firm (So the MC curve applies for both groups (because it is the same supplier of a single product for the two groups), although demand and MR are unique to each group since the markets can be segmented. Find the profit-maximizing output, price, and profits in each market. You may assume that TC = AC*Q (cost per unit*number of units). Label the correct price and quantity for each graph in part a.
d. What are the elasticities at the profit-maximizing quantities that you found in part c?
e. Can you say anything about how the price charged in each market relates to the relative price elasticities of demand you calculated in part d? Try to explain intuitively using an example of a real product that you might consume, in which the supplier of a single product can segment the market and in fact charge different prices to two different groups.
f. Now suppose that the above firm cannot segment the two markets. Solve for the single profit-maximizing price and quantity. What are profits equal to?

greenimpala359

Salvatore Chapter 1:

Discussion Questions: 9. How is the concept of a normal return on investment related to the distinction between business and economic profit?

Problems:

5. Determine which of the two investment projects a manager should choose if the discount rate of the firm is 10%. The first project promises a profit of $100,000 in each of the next 4 years, while the second project promises a profit of $75,000 in each of the next 6 years.

6. Determine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 20%.

15. Integration Problem Samantha Roberts has a job as a pharmacist earning $30,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $40,000 per year or to purchase a pharmacy that generates a revenue of $200,000per year. To purchase the pharmacy, Samantha would have to use her $20,000 savings and borrow another $80,000 at an interest rate of 10% per year. The pharmacy that Samantha is contemplating purchasing has additional expenses of $80,000 for supplies, $40,000 for hired help, $10,000 for rent, and $5,000 for utilities. Assume that income and business taxes are zero and that the repayment of the principle of the loan does not start before 3 years. (a) What would be the business and economic profit if Samantha purchased the pharmacy? Should Samantha purchase the pharmacy? (b) Suppose that Samantha expects that another pharmacy will open nearby at the end of 3 years and that this will drive the economic profit of the pharmacy to zero. What would the revenue of the pharmacy be in 3 years? (c) What theory of profit would account for profits being earned by the pharmacy during the first 3 years of operation? (d) Suppose that Samantha expects to sell the pharmacy at the end of 3 years for $50,000 more than the price she paid for it and that she requires a 15% return on her investment. Should she still purchase the pharmacy?

Spreadsheet Problem (see attached Excel doc)

Using the data below, (Excel doc) where column A represents student numbers, column B the finishing time for a 1 mile race for 10 students, and column C the age of the students, (a) Use the data analysis tools to plot a line graph of all the finishing times. (b) Calculate a mean, median, mode, sample variance, sample standard deviation, and coefficient of variation to statistically describe the data. (c) Use Excel to fine the covariance between the two variables. What does the covariance indicate about the relationship between finishing time and age?

Note:

P15(d): Change ââ¦ for $50,000 more than â¦â to ââ¦ for $50,000 less than â¦â Compare the present value of economic profit in each of the next three years and the loss of $50,000 in the third year using 15% as the discount rate.

The spreadsheet problem (b): Calculate a mean, â¦. to statistically describe the data of both variables, Time and Age.

Individual problems:

3-1 You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value). U2 has a concert the same knight, and this represents your next-best alternative activity. Tickets to the U2 concert cost $80, and on any particular day, you would be willing to pay up to $100 to see this band. Assume that there are no additional costs of seeing either show. Based on the information presented, what is the opportunity cost of seeing Bruce Springsteen?

3-3 Because of the housing bubble, many houses are now selling for much less than their selling price just 2 to 3 years ago. There is evidence that homeowners with virtually identical houses tend to ask for more is they paid more for the house. What fallacy are they making?

Salvatore Chapter 3:

Discussion Questions:

9. How would you react to a sales managerâs announcement that he or she has in place a marketing program to maximize sales?

Problems:

1(a). Given the following total-revenue function: TR= 9Q - Q^2

Derive the total-, average-, and marginal- revenue schedules from Q=0 to Q=6 by 1âs.

7. Given the total-cost schedule: Q 0 1 2 3 4

TC 1 12 14 15 20

Derive the average- and marginal-cost schedules.

9. With the total-revenue curve of Problem 1 and the total-cost curve of problem 7, derive the total-profit function and show how the firm determines the profit-maximizing level of output.

Note:

DQ9: Does maximum sales (revenue) equal maximum profit (see figure 3-4)?

Revised P1(a): Derive the total-revenue, average-revenue, and marginal-revenue schedules from Q = 0 to Q = 4 by 1s.

Average revenue (AR) = total revenue (TR)/Q

Marginal revenue (MR) = change in total revenue/change in Q

For example:

Q	TR	AR	MR
2	14	7 (=14/2)
3	18	6 (=18/3)	4 (=(18-14)/(3-2)

Revised P9: With the total-revenue schedule of Problem 1 and the total-cost schedule of Problem 7, show the profit-maximizing level of output (profit=TR-TC).

Froeb et al. Chapter 4:

Individual problems:

4-5 Your insurance firm processes claims through its newer, larger high-tech facility and its older, smaller low-tech facility. Each month, the high-tech facility handles 10,000 claims, incurs $100,000 in fixed costs and $100,000 in variable costs. Each month, the low-tech facility handles 2,000 claims, incurs $16,000 in fixed costs and $24,000 in variable costs. If you anticipate a decrease in the number of claims, where will you lay off workers?

4-6 A copier company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two new copiers, and output increased by 100,000 pages per day. One month ago, they added five workers, and productivity also increased by 50,000 pages per day. Copiers cost about twice as much as workers. Would you recommend they hire another employee or buy another copier?

CAS EC 101 Lecture Notes - Lecture 7: Form 10-Q, Marginal Cost, Fixed Cost

CAS EC 101 Full Course Notes

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