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# Producer Behavior and Costs

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Producer Behavior and Costs

1. Town workers occasionally use their own automobiles on official business. The currentreimbursement rate is \$.25 per mile. The employees' union complains to the town manager thatnumerous studies show that the cost of operating an automobile is really \$.50 per mile, so that the current rate is too low. The manager notes that workers seem delighted when they have an excuse to
use their own cars and get reimbursed at a "measly" \$.25 per mile. Assuming that both the union and the management are factually correct, explain this situation.

2. Farmers currently use 50 units of capital and 25 hours of labor to harvest an acre of tomatoes. Capital costs \$2.00 per unit and labor costs \$5.00 per hour, so the total cost is 50(2) + 25(5.00) = \$225.00 per acre. The minimum wage is increased to \$5.75 per hour. The Labor Department estimates that costs will rise by 25(5.75 - 5.00) = \$18.75, to \$243.75 per acre. Is that likely to be an
over or underestimate? Are there conditions when it will be exactly right?

3. A firm has two plants, each with different marginal cost curves. Suppose plant 1 has MC = .1Q and plant 2 has MC = 1 + .05Q. Imagine that they want to produce Q = 100. How much would it produce at each plant?

4. On your last vacation to sunny Elko, Nevada you noticed that the casinos had \$1.00 and \$0.05 slot machines. You ask the casino owner which machine is more profitable and he assures you that on average they make more off the \$1.00 machines than the \$0.05. Why does the casino keep the \$0.05
machines around? Would they be better off to replace the \$0.05 machines with \$1.00 machines? Assume that the \$1.00 slot machine costs as much as the \$0.05 slot machine for the casino owner to
purchase. (Hint: is the average revenue the relevant measure?)

5. Suppose that a firm has \$100 in fixed costs and has constant marginal costs of \$10.

a) Graph this firm's MC, AC, AFC, and AVC curves.
b) What is the minimum efficient scale of production for this firm?
c) How many firms will operate in this industry?

https://brainmass.com/economics/general-equilibrium/producer-behavior-and-costs-54364

#### Solution Preview

1. Town workers occasionally use their own automobiles on official business. The current reimbursement rate is \$.25 per mile. The employees' union complains to the town manager that numerous studies show that the cost of operating an automobile is really \$.50 per mile, so that the current rate is too low. The manager notes that workers seem delighted when they have an excuse to use their own cars and get reimbursed at a "measly" \$.25 per mile. Assuming that both the union and the management are factually correct, explain this situation.

This is a question about preference. The assumption is that workers prefer their own cars to the company's cars. Then the workers get utility = u by driving their own cars. When they get reimbursement, the total utility gained will be u+0.25. As soon as the total utility is higher than the total cost of driving their own cars, which is 0.50, the workers would be happy to do that. (i.e., u+0.25 > 0.50, workers are willing to drive their own cars.)

2. Farmers currently use 50 units of capital and 25 hours of labor to harvest an acre of tomatoes. Capital costs \$2.00 per unit and labor costs \$5.00 per hour, so the ...

#### Solution Summary

Producer Behavior and Costs are assessed.

\$2.19

## Cost of Goods Manufactured Schedule; Cost Behavior

Case 1, Assignment 1

Schedule of Cost of Goods Manufactured

Dalton Brothers Manufacturing, Inc. began business in July 2011. The firm makes mud boats for retail sale. Following are data taken from the firm's accounting records that pertain to its first month in operation.

Direct material purchased on account - \$900,000
Direct material issued to production - 377,000
Direct labor payroll accrued - 126,800
Indirect labor payroll paid - 40,600
Factory insurance expired - 6,000
Factory utilities paid - 17,800
Factory depreciation recorded - 230,300
Ending Work in Process Inventory - 51,000
Ending Finished Goods Inventory (30units) - 97,500
Sales on account (\$5,200 per unit) - 1,040,000

Required:

1. How many units did the company sell in July 2011?
2. Prepare a schedule of cost of goods manufactured for July 2011?
3. How many units were completed in July?
4. What was the per unit cost of goods manufactured for the month?
5. What was the cost of goods sold in the first month of operations?
6. What was the gross margin for July 2011?

Case 1 Assignment 2

Toni Rankin has been elected to handle the local Little Theater summer play. The theater has a maximum capacity of 1,000 patrons. Rankin is trying to determine the price to charge Little Theater members for attendance at this year's performance of The Producers. She has developed the following cost estimates associated with the play:

1. Cost of printing invitations will be \$360 for 100-500; cost to print between 501 and 1,000 will be \$450.
2. Cost of readying and operating the theater for three evenings will be \$900 if attendance is 500 or less; this cost rises to \$1,200 if attendance is above 500.
3. Potage to mail the invitations will be \$0.60 each.
4. Cost of building stage sets will be \$1,800.
5. Cost of printing up to 1,000 programs will be \$350.
6. Cost of security will be \$110 per night plus \$30 per hour; five hours will be needed each night.
7. Cost to obtain script usage is \$2,000.
8. Costumes will be donated by several local businesses.

The Little Theater has 300 members, and each member is allowed two guests. Ordinarily only 60 percent of the members attend the summer offering. Of those attending, half bring one guest and the other half bring two guests. The play will be presented from 8 to 11 PM each evening. Invitations are mailed to those members calling to say they plan to attend and also to each of the guests they specify. Rankin has asked you to help her by answering the following items.

Required:

1. Indicate the type of cost behavior exhibited by each of the items Rankin needs to consider.
2. If the ordinary attendance occurs, what will be the total cost of the summer production?
3. If the ordinary attendance occurs, what will be the cost per person attending?
4. If 90 percent of the members attend and each invites two guests, what will be the total cost of the play? The cost per person? What primarily causes the difference in the cost per person?

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