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Average, fixed, total variables and costs

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1. Explain any two causes of economies of scale or diseconomies of scale. How is the U shape of the long run ATC different from the U shape of the short run ATC?

2. You are given the following information for units 0-6 that are produced by The Kimoneto Corp. of Miami, Florida. The average fixed cost of unit 4 is $38.50; The total variable cost of unit 3 is $165.00 while that of unit 6 is $522.50; The average total cost of unit 5 is $99.00, while the average variable cost of unit 4 is $55.00; The total cost of unit 1 is $247.50 while the total cost of unit 2 is $308.00.

a. Calculate the TFC, TVC, TC, AFC, AVC, ATC, and MC for units 0 though 6 based on the data above.

b. Explain in detail, you can use graphs if you like to help your explanation, how the TFC, TVC and TC are related to each other. Do NOT simply provide a formula to explain it.

Explain how the AVC and ATC are related to each other.

3. Explain the difference accounting profit, normal profit and economic profit. What role does explicit and implicit costs play in each? Why should we be concerned about the differences between these different types of profits? If normal profit is zero, is that good or bad from a business perspective? Explain.

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Solution Summary

This solution shows a detailed calculation of total fixed and variable cost, average fixed and variable cost, and marginal cost of The Kimoneto Corporation. The relationship between total fixed cost, total variable cost, and total cost is illustrated graphically. Also, the concepts of accounting profit, normal profit, economic profit, explicit cost, and implicit cost are explained.

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Dear Student:

Q1. We assume that the long-run ATC curve is U-shaped, because in the economies of scale (economies of mass production), the long-run average-total-costs of production are lower. Some reasons for this: (1) increased specialization of labor, (2) managerial specialization, (3) use of efficient capital, such as efficient assembly line equipment in the car industry, (4) design, development, and advertising costs per unit are lower.

At some point the expanding firm starts to experience the problems of diseconomies of scale, and the benefits of mass production may become burdens. It may become more and more difficult for the company to control and coordinate the operations, and the addition of managerial hierarchy may stifle innovation and flexibility. Decision making becomes more complex and slower. The result can be impaired efficiency and rising total costs.

Definitions:
Economies of scale: reductions in the average total cost of producing a product as the firm expands the size of plant (its output) ...

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