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Analyzing and Calculating Production Costs

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Please refer attached file for better clarity of tables and expressions.

1. Consider the following table of numbers, which represents demand and cost conditions for a competitive firm.
(a) Fill in the missing values.
(b) What level of output should the firm produce? Explain.

P = MR Q TFC AFC TVC AVC TC ATC MC TR Total Profit
600 0 - 0 - 570 -
600 1 570 240
600 2 430
600 3 670
600 4 960
600 5 1350
600 6 1840
600 7 2430
600 8 3120
600 9 3910
600 10 4800

2. You own four firms that produce different products. The following table summarizes the conditions in each firm. After calculating the missing numbers for each firm, make one of the following four decisions regarding operations in each firm, and explain why a particular decision is reached.

(a) continue producing the same output level

(b) shut down

(c) increase output

(d) decrease output

Firm P MR TR Q TC MC ATC AVC
A 11 8 20 200 5 9
B 3 1 100 1.5 2.5 2
C 4 2 200 2 7 5
D 8 5 10 70 5 6

3. Given the market share information in the table below, calculate the four firm concentration ratio and the Herfindahl index.

Firm
Number Market Share
(%)
1 35
2 25
3 15
4 15
5 10

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Solution Summary

There are 3 problems. Solutions to first two problems depicts the methodology and formulas to calculate and analyze various production costs. Solution to last problem demonstrate the steps needed to calculate HHI Index and 4-firm concentration ratio.

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Please refer attached file for better clarity of tables and expressions.

Solutions:

1. Consider the following table of numbers, which represents demand and cost conditions for a competitive firm.
(a) Fill in the missing values.

P=MR Q TFC AFC TVC AVC TC ATC MC TR Total Profit
600 0 570 - 0 - 570 - - 0 -570
600 1 570 570 240 240.0 810 810.0 *240 600 -210
600 2 570 285 430 215.0 1000 500.0 190 1200 200
600 3 570 190 670 223.3 1240 413.3 240 1800 560
600 4 570 143 960 240.0 1530 382.5 290 2400 870
600 5 570 114 1350 270.0 1920 384.0 390 3000 1080
600 6 570 95 1840 306.7 2410 401.7 490 3600 1190
600 7 570 81 2430 347.1 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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