# Analyzing and Calculating Production Costs

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

https://brainmass.com/economics/output-and-costs/analyzing-calculating-production-costs-254039

#### Solution Preview

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 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.

Microeconomics

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm's output is $25. The cost of other variable inputs is $400,000 per day. Although you do not know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.

Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas:

? Total Variable Cost = (Number of Workers * Worker's Daily Wage) + Other Variable Costs

? Average Variable Cost = Total Variable Cost / Units of Output per Day

? Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day

? Worker Productivity = Units of Output per Day / Number of Workers

Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above.

For both cases, calculate the firm's profit or loss.

For both sets of calculations, compare the firm's output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?

For one of the cases, if the firm can operate at a loss in the short-run, how many employees need to be laid off in order for the company to break even? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a break even state?

Provide a two to four page report to management of the firm that discusses what should be done.

Be sure to show your work to support the decision you outline in your report.