ECON 1010 Lecture : Production and Costs.docx

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jadeplatypus42

29 Apr 2013

School

University of Manitoba

Department

Economics

Course

ECON 1010

Professor

Sarrah Vakili

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ECON 1010 Full Course Notes

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Costs are defined as those expenses faced by a business when producing a good or service for a market. Every business faces costs and these must be recouped from selling goods and services at different prices if a business is to make a profit from its activities. In the short run a firm will have fixed and variable costs of production. Total cost is made up of fixed costs and variable costs. These costs relate do not vary directly with the level of output. I. e. as production rises, a firm will face higher total variable costs because it needs to purchase extra resources to achieve an expansion of supply. Examples of variable costs for a business include the costs of raw materials, labour costs and other consumables and components used directly in the production process. We can illustrate the concept of fixed cost curves using the table below.

Related Questions

Jennifer Trucking Company operates a large rig transportation business in Texas that transports locally grown vegetables to San Diego, California. The company owns 5 large rigs and hires local drivers paid fixed salaries monthly, regardless of the number of trips or tons of cargo that each driver transports each month. The below table presents details about the number of drivers and the total cargo transported by the company at different staff levels.

Drivers employed

Total Cargo Transported (tons)

a. Which inputs are fixed and which are variable in the production function of Jennifer Trucking Company? Over what ranges do there appear to be increasing, constant and/or diminishing returns to the number of drivers employed?

b. What number of drivers appears to be most efficient in terms of output per driver?

c. What number of drivers appears to minimize the marginal cost of transportation assuming that all drivers are paid the same salary?

Over the past 12 months the Four Winds Novelty Company firm has recorded its internet sales (equals monthly output levels) and its monthly total variable costs (TVC) for a particular novelty item as shown in the following table. Sales have grown over this period with relatively few shocks due to uncontrollable weather, political and sporting events. This online retailer carries no inventories; when it receives a pre-paid on-line order from a customer, it simply buys the product from a supplier and ships it out to the customer.

Sales = Output

TVC ($)

102,813
176,163
196,121
222,885
226,356
296,416
378,446
450,666
579,696
607,082
624,680
636,133

201,953
340,608
377,940
432,863
441,714
629,267
867,596
1,103,807
1,701,125
1,917,861
2,195,352
2,479,195

a. Using regression analysis, find an equation that best fits the data to represent the TVC function.

b. At what sales/output level will marginal costs (MC) reach a minimum?

c. Estimate the value of TVC for sales/output level 250,000 units, and calculate the 95% confidence interval for your estimate.

mauvegoldfish496

PLEASE ANSWER ALL PARTS OF ALL QUESTIONS THOUROUGHLY (WILL GIVE GOOD RATING-THANKS)

A. Consider an entrepreneur who has decided to follow through on a business venture. He has quit his job where he was employed as a Medical Assistant earning $2,500 a month, and has decided to run this new business venture alone as the sole proprietor. He approaches a bank with his business idea and obtains a loan for the startup and purchases the equipment and machinery that he would need for the business including the purchase of a web address and design for his business, he also takes out a 2 year lease on a building and adjoining property, with paid utilities at an excellent location and contracts with suppliers to provide him with raw materials on a six month basis at discounted bulk purchase rates. His total fixed costs on a monthly basis for this venture, which includes his forgone earnings from his previous job, are $7,500.

He now needs to hire workers to operate the machines, handle orders etc. and he needs at least 5 workers to begin production. Having taking ECON 2020 while in college, he computes the total product function for his business, on a monthly basis, given the quantity of other resources he has, in the short run as follows:

Quantity of Labor (Number of workers)	Total Product (Output)
5	200
10	450
15	800
20	1100
25	1300
30	1400

1. First, assume no other information on the profitability of this venture, what is the implied 'profit' expected by the entrepreneur each month? Explain

2. Obtain the marginal physical product of this business, graph the function and provide an intuitive explanation for the shape of the function.

3. Now suppose each worker hired is paid $10/hr in wages and works 150 hours each month. Obtain the monthly total variable, total fixed and total cost functions for this business if it produces at the various output levels in the table above (i.e. fill out the table below, and show all necessary work below)

Output (Q)	Total Fixed Cost	Total Variable Cost	Total Cost
200
450
800
1100
1300
1400

4. The entrepreneur knows that his business is producing in an environment of perfect competition and as a result the market determined price after his entry into the business is $37.50 for each unit of the product that he sells. Determine the firm's monthly profit maximizing (or loss minimizing) output level , using the profit maximizing rule

5. From (4), is this firm making any excess (economic) profits in the short run? Explain. Compute the firm's monthly profits (or losses) at the profit maximizing output level

6. What should we expect to happen in the long run in this industry as a result of the correct answers given in part (5)? Explain.

blushcamel945

a) What is the Fixed Cost of production (recall that it does not vary with output)

b) Calculate and graph (on the next page) Average Variable Cost, Average Fixed Cost, Average

Total Cost, and Marginal Cost.

Q VC TC

10 500 3000

20 800 3300

30 1350 3850

40 2300 4800

50 3750 6250

60 6000 8500

70 9450 11950

c) Explain why Average Variable Cost and Marginal Cost can fall initially,

but eventually rise.

d) If Fixed costs were to fall, how will that affect AFC, AVC, ATC, and

MC? Explain the intuition.

e) Explain the difference between the short-run and the long-run. How

does this concept relate to the data presented here?

f) Given a price of $145, how much of Good X will the perfectly competitive firm produce? How

much profit will the firm earn?

g) In the long run, if the market for X was made up of firms with the same cost structure,

what do you roughly expect the Perfect Competition market clearing price and per-firm

quantity to be? How much profit will they earn?

h) Given the following demand schedule, how much X would a monopoly produce, given the cost

table above? What price will they charge? How much profit will the firm earn?

Monopoly Demand:

P Q

$300 0

$270 10

$240 20

$210 30

$180 40

$150 50

$120 60

$90 70

ECON 1010 Lecture : Production and Costs.docx

ECON 1010 Full Course Notes

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