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##### Cost analysis

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Problem set 5;The Supply Decision;1.;(a) Complete the following table of costs for a firm. (Note: enter the figures in the MC;column between outputs of 0 and 1, 1 and 2, 2 and 3, etc.);Output;TC (\$);AC (\$);0;55;1;85.;2;110.;3;130.;4.;40;5.;42;6;280.;7..;8..;9;610.;10..;MC (\$)......;90;110.;150;(b) How much is total fixed cost at;(i);an output of 0?.................................................................................................................;(ii) an output of 6?.................................................................................................................;(c) How much is average fixed cost at;(i);an output of 5?.................................................................................................................;(ii) an output of 10?...............................................................................................................;(d) How much is total variable cost at an output of 5?..................................................................;(e) How much is average variable cost at an output of 10?..........................................................;P;2.;(a) Referring to the data from question 1, draw the firms average and marginal cost curves on;the following diagram. (Remember to plot MC mid-way between the quantity figures.);140;120;Cost (\$);100;80;60;40;20;0;0;1;2;3;4;5;6;7;8;9;10;Output;(b) Mark on the diagram the output at which diminishing returns set in.;(c) Assume that the firm is a price taker and faces a market price of \$60 per unit.;Draw the firms AR and MR curves on the above diagram.;(d) How much will it produce in order to maximize profit?.........................................................;(e) Shade in the amount of profit it makes.;(f);Calculate how much profit this is...........................................................................................................................................................................................................................................;2;3.;The following is a list of various types of economies of scale;(i) The firm can benefit from the specialisation and division of labour.;(ii) It can overcome the problem of indivisibilities.;(iii) It can obtain inputs at a lower price.;(iv) Large containers/machines have a greater capacity relative to their surface area.;(v) The firm may be able to obtain finance at lower cost.;(vi) It becomes economical to sell by-products.;(vii) Production can take place in integrated plants.;(viii) Risks can be spread with a larger number of products or plants.;Match each of the following examples for a particular firm to one of these types of economy of scale.;(a) Delivery vans can carry full loads to single destinations................;(b) It can more easily make a public issue of shares................;(c) It can diversify into other markets................;(d) Workers spend less time having to train for a wide variety of different tasks, and;less time moving from task to task................;(e) It negotiates bulk discount with a supplier of raw materials................;(f) It uses large warehouses to store its raw materials and finished goods................;(g) A clothing manufacturer does a deal to supply a soft toy manufacturer with offcuts;for stuffing toys................;(h) Conveyor belts transfer the product through several stages of the manufacturing;process................;3;This page consists of three multiple choice questions;In each case, circle the correct answer.;4.;If, at the current level of output, a firms average cost is greater than its marginal cost, then;A.;B.;A reduction in output would raise average cost.;C.;The firm is producing beyond its minimum average cost level.;D.;The marginal cost curve is downward sloping at the current level of output.;E.;5.;An increase in output must raise its average cost still further above marginal cost.;Average fixed cost must be constant.;A firm discovers that if it either increases or reduces output, its short-run average cost increases.;It follows that;A.;B.;The firm is maximising its marginal cost at its present at its present output.;C.;The firm is producing at the point where marginal cost equals average cost.;D.;Diseconomies of scale are present.;E.;6.;The firm is maximising profit at its present output.;Total costs are at a minimum.;The information in the following table relates to a firms average and marginal costs of;operating each of three plants (X, Y and Z). Each plant has a U-shaped average cost curve.;Plant;Plant X;Plant Y;Plant Z;Average cost (\$);16;14;14;Marginal cost (\$);16;13;16;The firm is a price taker, selling its product for \$15 per unit. In order to maximize profit, the;firm in the long run will;A.;Expand production at plant X, shut down plant Y and reduce production at plant Z.;B.;Expand production at plant X, reduce production at plant Y and shut down plant Z.;C.;Shut down plant X, expand production at plant Y and reduce production at plant Z;D.;Shut down plant X, reduce production at plant Y and expand production at plant Z;E.;Reduce production at plant X, expand production at plant Y and shut down plant Z.;4

Paper#18299 | Written in 18-Jul-2015

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