Economic Analysis

Topics: Costs, Economics, Variable cost, Marginal cost, Total cost, Cost / Pages: 4 (849 words) / Published: Sep 22nd, 2014
Tahania Rashid
MBA 6008 – Global Economic Environment
September 14, 2014
Unit 3 Assignment 1
Chapter 9 - Problem 3, pg. 219

Q: You are a newspaper publisher. You are in the middle of a one- year rental contract for your factory that requires you to pay $ 500,000 per month, and you have contractual labor obligations of $ 1 million per month that you can’t get out of. You also have a marginal printing cost of $ 0.35 per paper as well as a marginal delivery cost of $ 0.10 per paper. If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month, what happens to the AFC per paper, the MC per paper, and the minimum amount that you must charge to break even on these costs?
A:
The following are fixed costs:
Rent: $500,000/mo
Labor: $1,000,000
The following are variable costs:
Printing: $0.25/paper
Delivery: $0.10/paper
Fixed cost: 1,500,000/mo and marginal cost: $0.35/paper

AFC=FC/Q
At 1,000,000 papers
At 800,000 papers

AFC= 1500000/1000000
AFC=1500000/800000

AFC= $1.50/mo
AFC= $1.875/mo
MC= $0.35 per paper and does not change with the number of papers.

Minimum amount we must charge to break even is average total cost.

ATC= AFC AVC

ATC= FC/Q VC/Q

VC= MC*Q

ATC= FC/Q MC

ATC= FC/Q 0.35

At Q= 1,000,000
At Q= 800,000

ATC= 1.50, 0.35
ATC= 1.875, 0.35

ATC= $1.85
ATC= $2.225

The AFC changes from 1.50 to 1.875. That’s an increase of 0.375. The MC remains constant at 0.35 because printing and delivery costs per paper are unchanged. The minimum amount we must charge to break even increases from 1.85 to 2.225, which is an increase of 0.375.

Tahania Rashid
MBA 6008 – Global Economic Environment
September 14, 2014
Unit 3 Assignment 1
Chapter 10 – Problem 4, pg. 238

a. At a product price of $ 56, will this firm produce in the short run? If it is preferable to produce, what will be the profit- maximizing or

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