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Edward the entrepreneur takes 2 hours to cut a lawn, and he cuts1,000 lawns per year. He uses solar-powered equipment (truck and over) that will last forever -- and could be sold at any time for$20,000. Edward could earn $12 per hour as a pedicurist. The interest rate is 10%.

Given his current output level, compute his marginal cost and the average cost of cutting lawns. Suppose he decides to reduce the number of lawns cut by half, to 500 per year. Compute the new marginal cost and average cost.

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Ritu Kharb
Ritu KharbLv5
28 Sep 2019

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Related questions

Alternatives and Costs

In the fall, Jay Thompson decided to live in a university dormitory. He signed a dorm contract under which he was obligated to pay the room rent for the full college year. One clause stated that if he moved out during the year, he could sell his dorm contract to another student who would move into the dormitory as his replacement. The dorm cost was $5,000 for the two semesters, which Jay had already paid.

A month after he moved into the dorm, he decided he would prefer to live in an apartment. That week, after some searching for a replacement to fulfill his dorm contract, Jay had two offers. One student offered to move in immediately and to pay Jay $300 per month for the eight remaining months of the school year. A second student offered to move in the second semester and pay $2,500 to Jay.

Jay estimates his food cost per month is $500 if he lives in the dorm and $450 if he lives in an apartment with three other students. His share of the apartment rent and utilities will be $400 per month. Assume each semester is 4.5 months long. Disregard the small differences in the timing of the disbursements or receipts.

(a) What are the three alternatives available to Jay?

(b) Evaluate the cost for each of the alternatives.

(c) What do you recommend that Jay do?

From Chapter 2

Fixed, Variable, Average, and Marginal Costs

One of your firm’s suppliers discounts prices for larger quantities. The first 1,000 parts are $13 each. The next 2,000 are $12 each. All parts in excess of 3,000 are $11 each. What are the average cost and marginal cost per part for the following quantities?

(a) 500

(b) 1,500

(c) 2,500

(d) 3,500

Fixed, Variable, Average, and Marginal Costs

A new machine comes with 100 free service hours over the first year. Additional time costs $75 per hour. What are the average and marginal costs per hour for the following quantities?

(a) 75

(b) 125

(c) 250

Segmenting Models

SungSam Inc. is designing a new digital camcorder that is projected to have the following per unit costs to manufacture:

Cost Categories Unit Costs

Materials costs $63

Labor costs 24

Overhead costs 110

------

Total unit cost $197

Sungsam adds 30% to its manufacturing cost for corporate profit.

(a) What unit profit would Sungsam realize on each camcorder?

(b) What is the overall cost to produce a batch of 10,000 camcorders?

(c) What would Sungsam’s profit be on the batch of 10,000 if historical data show that 1% of product will be scrapped in manufacturing, 3% of finished products will go unsold, and 2% of sold product will be returned for refund?

(d) How much can Sungsam afford to pay for a contract that would lock in a 50% reduction in the unit material cost previously given? If Sungsam does sign the contract, the sales price will not change.

Cash Flow Diagrams

Pine Village needs some additional recreation fields. Construction will cost $225,000 and annual O&M expenses are $85,000. The city council estimates that the value of added youth leagues is about $190,000 annually. In year 6 another $75,000 will be needed to refurbish the fields. The salvage value is estimated to be $100,000 after 10 years. Draw the cash flow diagram.

II. Mr. I.M Farmer has been producing 500 acres of irrigated cotton in the Texas High Plains. He is very concerned about increasing fuel costs because he uses a lot of fuel to pump irrigation water. He is also concerned because he believes that the price of cotton could drop to 58 cents per pound. He is not sure that he can profitably produce cotton if the price falls to 58 cents or less.

Assume you have been asked to analyze this problem. With the help of an extension agent, you developed the following cost schedule for irrigated cotton at various levels of production. All costs were figured on a per-acre basis. Fixed costs are $110 per acre. Total variable costs per acre are listed in the chart below.

Mr. Farmer has asked you to compute the profit-maximizing level of production and the amount of profit he can expect at various cotton prices. He particularly wants advice about whether or not he should produce any cotton at all if the price drops to 58 cents per pound. (Assume I. M. Farmer has no alternative to cotton; that is he either produces cotton or nothing.)

1. What is the most profitable cotton yield if the price is 80 cents per pound? What is the profit or loss per acre?

Yield_________________________________

Profit/Loss_________ _______________

2. a) If the price does fall to 58 cents per pound, should Mr. Farmer produce any cotton?

( ) Yes ( ) No

If yes, profit maximizing yield per acre___________________

Profit/loss per acre______ ______

b) How much would Mr. Farmer lose if he did not produce any cotton some year?

Loss per acre_____________________

3. If the expected price is only 40 cents per pound, should Mr. Farmer try to produce anything?

( ) Yes ( ) No

If he does produce, how much? ______ ___________lbs per acre.

What would Profit/Loss be if he produces? __ ________(per acre)

4. What is the lowest price that Mr. Farmer can receive and just cover all his costs? At what yield?

Price_________ _________________

Yield_________ ___________________

Profit/Loss_____ ____________(per acre)

5. At what price will Mr. Farmer stop producing? ____ ___________

Total Product

(lbs./acre)

Total variable

cost

Total fixed

cost

Total cost

Average Cost

Per Lb.

Marginal cost

Marginal Revenue

      

Fixed

Variable

Total

Marginal Cost

Marginal Revenue

      

200

65.80

110

175.8

.55

.33

.88

.224

.58

      

250

77.00

110

187

.44

.31

.75

.073

.58

      

300

80.68

110

190.68

.36

.27

.63

.14

.58

    

 

350

87.59

110

197.59

.314

.25

.56

.15

.58

      

400

94.94

110

204.94

.28

.24

.52

.18

.58

      

450

103.80

110

213.8

.24

.23

.47

.23

.58

      

500

115.30

110

225.30

.22

.23

.45

.02

.58

      

550

133.30

110

243.30

.20

.24

.44

.36

.58

      

600

155.55

110

265.55

.18

.26

.44

.45

.58

      

650

182.80

110

292.80

.17

.28

.45

.56

.58

      

700

215.55

110

325.55

.16

.31

.47

.66

.58

      

750

254.30

110

364.30

.15

.34

.49

.78

.58

      

800

295.80

110

405.8

.14

.37

.51

.83

.58

      
Paul's accountant will most likely includes which of the followingcosts on his financial statements?Paul owns a car wash.
A) dividends Paul’s money was earning in the stock market beforePaul sold his stock and bought a car wash
B) All of the given answers are correct.
C) the cost of cleaning supplies
D) wages Paul could earn washing windows
2.
Farmer Jack decided to use his land to grow corn rather than use itto grow vegetables, the amount of money that he gave up by notgrowing vegetable is
A) forgone accounting profit.
B) an explicit cost.
C) an implicit cost.
D) an accounting cost
3.
Intel sold 2 million chips at a price of $10 per chip. For lastyear, the firm’s
A) explicit costs amounted to $20 million.
B) accounting profit amounted to $20 million.
C) economic profit amounted to $20 million.
D) total revenue amounted to $20 million.
4.
Mandy earned $40,000 per year in her Sales Manager job. She quither job in order to start her own catering business. To buy thenecessary equipment, she withdrew $20,000 from her savings, (whichpaid 3 percent interest) and borrowed $30,000 from her uncle, whomshe pays 3 percent interest per year. Last year she paid $25,000for ingredients and had revenue of $60,000. She asked Louis theaccountant and Greg the economist to calculate her profit forher.
A) Louis says her profit is $35,000 and Greg says she lost$5,000.
B) Louis says her profit is $34,100 and Greg says she lost$6,500.
C) Louis says her profit is $33,500 and Greg says her profit is33,500.
D) Louis says her profit is $34,100 and Greg says her profit is$6,500.
5.
In the short run
A) The firm can vary the size of its factory, but not the number ofworkers it employs.
B) The firm can vary neither the size of its factory nor the numberof workers it employs.
C) The firm can vary both the size of its factory and the number ofworkers it employs.
D) The firm can vary the number of workers it employs, but not thesize of its factory.
6.
If a firm’s production function is shown on a graph and the numberof workers hired is the only variable input, then

A) total cost is measured on the horizontal axis and the number ofworkers is measured on the vertical axis.
B) the number of workers is measured on the horizontal axis and thequantity of output is measured on the vertical axis.
C) the number of workers is measured on the horizontal axis andvariable cost is measured on the vertical axis.
D) the number of workers is measured on the horizontal axis andprofit is measured on the vertical axis.
7.
marginal cost is
A) The amount by which total cost rises when the firm produces oneadditional unit of output.
B) is calculated the same way as average cost
C) total cost minus fixed cost.
D) The amount of total cost divided by units of output.
8.
If a firm is at the efficient scale of output it means that thequantity of output is such that it
A) maximizes marginal product.
B) maximizes profit.
C) minimizes average total cost(ATC) and average variable cost isequal to ATC
D) minimizes average total cost (ATC)and marginal cost is equal tothe ATC
9.
When marginal cost is less than average total cost,
A) average total cost is rising.
B) average variable cost must be falling.
C) average total cost is falling.
D) marginal cost must be falling.
10.
Regarding a the firm's cost of production,which of the followingstatements is false?
A) Marginal cost is independent of fixed costs.
B) In the long run, there are no fixed costs.
C) Diminishing marginal product explains increasing marginalcost.
D) Economies of scale is a short-run concept.

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