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Production Costs Analysis

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(1)Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and materials cost $20,000 per year. Gomez has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. Gomez has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from pottery sales is $72,000. Calculate accounting profits and economic profits for Gomez's pottery

(2)List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs-fixed, variable, or both- would you take into account in making your decision? Would any implicit costs be relevant? Explain.

(3)A firm has fixed costs of $60 and variable costs as indicated in the table below. Complete the table. When finished, check your calculations.

0 0
1 45
2 85
3 120
4 150
5 185
6 225
7 270
8 325
9 390
10 465

a.Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the total variable-cost and total cost curves.
b.Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and ATC curves at their minimum points.
c.Explain how the locations of each of the four curves graphed in question 7b would be altered if (1) total fixed cost had been $100 rather than $60, and (2) total variable cost had been $10 less at each level of output.

4)In the table below you will find a schedule of a firm's fixed cost and variable cost. Complete the table by computing total cost, average fixed cost, average variable cost, average total cost, and marginal cost.

0 $100 $0
1 100 100
2 100 180
3 100 240
4 100 320
5 100 440
6 100 600
7 100 800
8 100 1040
9 100 1340
10 100 1800

(5)What effect would each of the following have on the short-run average and marginal costs of an auto dealership: (a) auto mechanics receive a 10% wage increase; (b) property taxes decrease; (c) auto dealers institute a one-time only promotional campaign?

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Solution Preview

Please refer attached file for complete solution. Graphs are missing here. Some of the expressions typed here may not be exactly same as in attached file.


Problem 1

Explicit costs
Helper cost $12,000
Annual cost $5,000
Materials $20,000
Total Explicit costs $37,000
Implicit costs
Interest on his invesment $4,000
Forgone salary $15,000
Enterpreneurial talents $3,000
Total Implicit costs $22,000

Total Revenues $72,000

Accounting profit=Total Revenues-Explicit costs= $35,000
Economic Profits=Total Revecnues-Explicit costs-Implicit costs= $13,000

Problem 2
Fixed costs Variable Costs Implicit costs
By car Maintenance costs Fuel costs Foregone interest on self's capital
Depreciation Cost of Extra time needed in car travel that might have been
utilized in some other productive work
Principal and interest payments if any

By Flight Ticket Cost costs for not using the car for travel

Problem 3

0 60 0 60
1 60 45 105 60.0 45.0 105.0 45.0
2 60 85 ...

Solution Summary

There are 5 problems. Solution to first problem explains the steps in calculating economic and accounting profits. Solution to second problem identifies the various costs. Solution to other problems depicts the steps to calculate TC, AFC, AVC, ATC and marginal costs. Shapes of various curves are also discussed.

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