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economic costs

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1. Give a brief summary of economic costs (i.e. how are they different from accounting costs). In the short-run, why might a firm still operate even when there is a loss.

2. Read the following short article:

Vargas, L. (2001). ââ?¬Å"Maquiladoras: Impact on Texas Border Cities,ââ?¬Â? in The Border Economy, Federal Reserve Bank of Dallas. Retrieved on February 18, 2011 from: http://www.dallasfed.org/research/border/tbe_vargas.html

How does this article apply the marginal decision rule to the problem of choosing the mix of factors or production (capital intensive vs. labor intensive methods of production)? How do maquiladoras benefit the U.S. economy?

3. The type of firm also plays a crucial role in how the firm makes a profit. Describe the characteristics of a perfectly competitive firm in your own words. What will happen to the profits of a perfectly competitive firm in the long run?

4. Compare the profit for the perfectly competitive firm to a monopoly in the long run. Why is it different?

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Give a brief summary of economic costs (i.e. how are they different from accounting costs). In the short-run, why might a firm still operate even when there is a loss?

The economic cost depends on both the cost incurred as well as the opportunity costs. This is the sum of the option selected and value of the best possible benefit the best alternative would have provided if selected. Consider the cost of making plastic doll. The cost would include the cost of die, the designing and creation of clothes, the cost of plastic, packing, and other incidental expenses incurred. The opportunity cost of making the doll also includes the profit that the firm would have earned, had the factory been used for making the best possible alternative, or plastic medical equipment.

A firm still operates even when there is a loss because the operation contributes to the fixed cost of the firm. Usually, when the price is such that it is lower than the total cost but higher than the variable cost the firm operates so that the operation contributes to the fixed costs. This happens only in the short-run.

2. Read the following short article:
Vargas, ...

Solution Summary

This answer offers cogent arguments relating to economic costs

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Vintage Cellars: Evaluate Decision-Making Scenarios Using Linear Profit, Cost Modeling

Evaluating Decision-Making Scenarios Using Linear Profit and Cost Modeling

Analyze cost behaviors and decision-making scenarios using linear profit and cost modeling. In a Word document, complete the exercises below and submit your responses per the instructions that follow.
Vintage Cellars
Vintage Cellars manufactures a 1,000-bottle wine storage system that maintains optimum temperature (55-57 °) and humidity (50-80%) for aging wines. The system has a backup battery for power failures and can store red and white wines at different temperatures. The following table depicts how average cost varies with the number of units manufactured and sold (per month):

Quantity Average Cost
1 $12,000
2 10,000
3 8,600
4 7,700
5 7,100
6 7,100
7 7,350
8 7,850
9 8,600
10 9,600
Required:
a. Prepare a table that computes the total cost and marginal cost for each quantity between 1 and 10 units.
b. What is the relation between average cost and marginal cost?
c. What is the opportunity cost of producing one more unit if the company is currently producing and selling four units?
d. Vintage Cellars sells the units for $9,000 each. This price does not vary with the number of units sold. How many units should Vintage manufacture and sell each month?
Sunnybrook Farms
Sunnybrook Farms is a local grocery store that is currently open only Monday through Saturday. Sunnybrook is considering opening on Sundays. The annual incremental costs of Sunday openings are estimated at $24,960. Sunnybrook Farms' gross margin on sales is 20%. Sunnybrook estimates that 60% of its potential Sunday sales to customers are now made on other days. What 1-day volume of Sunday sales would be necessary for Sunnybrook Farms to attain the same weekly operating income as in the current 6-day week?

Taylor Chemicals
Taylor Chemicals produces a particular chemical at a fixed cost of $1,000 per day. The following table displays how marginal cost varies with output (in cases):
Quantity (Cases) Marginal Cost
1 $500
2 400
3 325
4 275
5 325
6 400
7 500
8 625
9 775
10 950

Required:
a. Given the preceding data, construct a table that reports total cost and average cost at various output levels from 1 to 10 cases.
b. At what quantity is average cost minimized?
c. Does marginal cost always intersect average cost at minimum average cost? Why?
Gas Prices
After the Iraqi invasion of Kuwait in August 1990, the world price of crude oil doubled to more than $30 per barrel in anticipation of reduced supply. Immediately, the oil companies raised the retail price on refined oil products even though these products were produced from oil purchased at the earlier, lower prices: The media charged the oil companies with profiteering and price gouging, and politicians promised immediate investigations.
Required:
Critically evaluate the charge that the oil companies profited from the Iraqi invasion. What advice would you offer the oil companies?

Penury Company
Line K Line L
Amount Per Unit Amount Per Unit Combined Amount
Sales Revenue $120,000 $1.20 $80,000 $0.80 $200,000
Variable expense 60,000 0.60 60,000 0.60 120,000
Contribution margin 60,000 $0.60 $20,000 $0.20 80,000
Fixed expense 50,000
Net Income $30,000
You are a new consultant with the Boston Group and have been sent to advise the executives of Penury Company. The company recently acquired product line L from an out-of-state concern and now plans to produce it, along with its old standby K, under one roof in a newly renovated facility. Management is quite proud of the acquisition, contending that the larger size and related cost savings will make the company far more profitable. The planned results of a month's operations, based on management's best estimates of the maximum product demanded at today's selling prices are
Required:
a. Based on historical operations, K alone incurred fixed expenses of $40,000, and L alone incurred fixed expenses of $20,000. Find the break-even point in sales dollars and units for each product separately.
b. Give reasons why the fixed costs for the two products combined are expected to be less than the sum of the fixed costs of each product line operating as a separate business.
c. Assuming that for each unit of K sold, one unit of L is sold, find the break-even point in sales dollars and units for each product.
Affording a Hybrid
With gasoline prices at $3.00 per gallon, consumers are flocking to purchase hybrid vehicles (combination of gasoline and electric motors) that get 50 miles per gallon of gasoline. The monthly payment on a 3-year lease of a hybrid is $499 compared to $399 per month on a conventional, equivalent traditional gasoline car that gets 25 miles per gallon. Both vehicles require a one-time $1,500 payment for taxes, license, and dealer charges. Both vehicles have identical lease terms for the residual value, maximum number of miles allowed without penalty, and so forth.
Required:
a. Calculate how many miles the consumer must drive per year to make the hybrid the economical choice over the conventional gasoline-only vehicle.
b. How does your answer to part (a) change if the price of the gasoline is $4.00 per gallon?

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