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Economic Margins, Price, Elasticity

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Chapter 21, Exercises 1-4, 11
1. Use the following information to determine the total fixed costs, total variable costs, average fixed costs, average variable costs, average total costs, and
marginal costs.

Total Output Costs TFC TVC AFC AVC ATC MC
0 $100
1 $150
2 $225
3 $230
4 $300
5 $400

2. Use the following table to answer the questions listed below.

Total Output Cost TFC TVC AFC AVC ATC MC
0 $20
10 $40
20 $60
30 $90
40 $120
50 $180
60 $280
a. Calculate the total fixed costs, total variable costs, average fixed costs, average variable costs, average total costs, and marginal costs.

b. Plot each of the cost curves.

c. At what quantity of output does marginal cost?
equal average total cost and average variable cost?

3. Using the table in exercise 1, explain what happens to ATC when MC > ATC, MC < ATC, and MC ¼ ATC.

4. Using the table in exercise 2, find the quantity where MC ¼ ATC. Find the quantity where ATC is at its minimum. Find the quantity that is the most
efficient operating point for the firm.
11. Consider a firm with a fixed-size production facility as described by its existing cost curves.

a. Explain what would happen to those cost curves if a mandatory health insurance program is imposed on all firms.

b. What would happen to the cost curves if the plan required the firm to provide a health insurance program for each employee worth 10 percent of the employee's salary?

c. How would that plan compare to one that requires each firm to provide a $100,000 group program that would cover all employees in the firm, no matter what the number of employees was?

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Solution Preview

Q1 and Q2 are in the attached spreadsheet.

Q3. When MC < ATC, as you produce more units, both MC and ATC will decrease. When MC > ATC, as you produce more units, both will increase. The turning point is when the two are equal. At this point, the firm profit maximizes (assume that it is a perfect competitor).

Q4. At Q = 30 (or 40), MC = ATC. At this point, ATC is at ...

Solution Summary

The expert determines the total fixed costs, total variable costs, average fixed costs, average variable costs and the average total costs.

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Tennis Products, Inc., produces three models of high-quality tennis rackets. The following table contains recent information on th4e sales, costs, and profitability of the three models:

Model Average Quantity Sold (Units/month) Current Price Total Revenue Variable Cost per unit Contribution margin per unit Contribution Margin
A 15,000 $30 $450,000 $15.00 $15 $225,000
B 5,000 $35 $175,000 $18.00 $17 $85,000
C 10,000 $45 $450,000 $20.00 $25 $250,000
Total $1,075,000 $560,000

The company is considering lowering the price of Model A to $27 in an effort to increase the number of units sold. Based on the results of price changes that have been instituted in the past, Tennis Products' chief economist has estimated the arc price elasticity of demand to be -2.5. Furthermore, she has estimated the arc cross elasticity of demand between Model A and Model B to be approximately 0.5 and between Model A and Model C to be approximately 0.2. Variable costs per unit are not expected to change over the anticipated changes in volume.

a. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin of Model A. Based on this analysis, should the firm lower the price of Model A?
b. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin for the enter line of tennis rackets. Based on this analysis, should the firm lower the price of Model A?

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