Purchase Solution

Economic and Accounting Cost Functions

Not what you're looking for?

Ask Custom Question

Three University of Florida engineering students are considering operating a mobile car clinic in Gainesville, Florida, during their summer break. This is an alternative to summer employment stacking plastic cups at a local injection molding manufacturer where they would earn $10,000 each over the three-month summer period. A van equipped for such service can be leased at a cost of $5,000 for the summer from an owner taking a long vacation in the Bahamas. Additional projected costs are $2,500 for insurance, and $5 per service call for materials and supplies. Their service calls would be priced at $30 per unit, plus any parts costs (parts will not be inventoried, but purchased from local parts outlets).

A. What is the accounting cost function for this business (ignoring parts)?
B. What is the economic cost function for this business?
C. What is the economic break even number of units for this operation? (Assume a $30 price and ignore interest costs associated with the timing of the lease payments.)

Purchase this Solution

Solution Summary

Solution determines the accounting and economic cost functions in the given case. It also calculates economic break even units.

Solution Preview

A. What is the accounting cost function for this business (ignoring parts)?

For accounting purposes, we consider explicit costs only.
Fixed Costs=Lease cost of van+ insurance costs=$5000+$2500=$7500
Variable Costs=$5 per service call
Ignore parts costs
Total Cost=Fixed Cost+ Total Variable Cost
TC=7500+5Q
Where Q is number of service calls

B. What is the ...

Solution provided by:
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution


Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.