Economics Unit 3

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  • Topic: Costs, Variable cost, Fixed cost
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DeNorris Lee
Economics 220
Unit 3 Individual Project
March 1, 2011

A 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


In demand to endorse a conclusion to whether we should continue the operations in the production department, we evaluated the cash flows from operating activities and recommend the management to continue the operations and do not shut down the plant; but it should seek to reduce the fixed costs associated with the production.

You are given the formulas needed to answer much of this on your own, but here goes:

In the first example (TFC = $1M):
TVC = $4.4M ($4M for wages (50,000 workers x $80 per worker) plus $400,000 other variable inputs AVC = $22 (TVC of $4.4M divided by 200,000 units)
ATC = $27 (TVC $4.4M + TFC $1M divided by 200,000 units)
Worker productivity = 4 (200,000 units divided by 50,000 workers) Profit/Loss = $400,000 loss (total revenue of 200,000 units times $25 price = $5M minus total cost of $5.4M (total cost can be calculated either by taking ATC times 200,000 units or by taking TVC plus TFC)

In the second example (TFC = $3M):
TVC unchanged at $4.4M
AVC unchanged at $22
ATC = $37 ($4.4M TVC plus $3M TFC divided by 200,000 units)
Worker productivity unchanged at 4...
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