COST ANALYSIS | My Assignment Tutor

Problem Set 6 COST ANALYSIS The following table shows the four topic sections of this chapter and the associated study guide problems that pertain to each topic section. Section   Topic  1        Relevant Costs              Problems M1-M8, S1-S2, L1-L2.  2        The Costs of Production              Problems M9-M14, S3-S5, L3-L4.  3        Returns to Scale and Scope              Problems M15-M20, S6-S8, L5-L6.  4        Cost Analysis and Optimal Decisions              Problems M21-M23, S9, L7-L9. Multiple Choice M1       In deciding between two actions, the manager needs to consider the Differential revenues and differential costs between the options.Total costs of the options.Fixed costs that do not vary between the options.Comparative revenues of the options.Variable costs of the options. M2       The opportunity cost of pursuing a full-time MBA degree is the Cost of tuition, textbooks, and other fees.Job wages (and advancement) forgone during the two years of study.Opportunity of receiving a higher salary after graduation.Cost of tuition plus room and board.Estimated cost of professors’ salaries. M3.      From a friend, you are offered 1 free ticket ($80 face value) to an Erik Clapton concert. The same night your favorite pop star, Justin Timberlake, is also playing in concert. You are willing to pay $140 to hear Justin, and the tickets are available at a price of $90. Taking the free ticket has an opportunity cost of             a.           $80.             b.             $0.             c.         $140.             d.           $50.             e.           $90. M4       A multiplex shows a new film in one of its theaters in which it would normally earn $8,000 per week for a typical film shown. To show the new film, the multiplex pays $6,000 per week to the film’s producer. The relevant cost of the film is $8,000 per week.$6,000 per week.$2,000 per week.$14,000 per week.There is too little information to answer. M5       The basic difference between economic cost and accounting cost is due to Explicit costs.Opportunity costs.Intangible costs.The allocation of fixed costs.Selling costs. M6       When valuing opportunity costs, managers generally rely on Imputed prices, based on best judgments.Tax-assessed prices (assuming the item is taxed).Market prices (assuming markets exist).Historic accounting prices.All of the answers above are correct. M7       When a publisher sells the same title as a hardback and as an e-book, It can separately maximize profit in the respective segments.Its hardback profit necessarily exceeds its e-book profit.The opportunity cost for each e-book is the foregone profit on the fewer hardbacks that are sold.The appropriate MC to impute to each e-book is $0.None of the answers listed above is correct. M8       When computing economic profit, we assume that capital earns a Zero rate of return.Normal rate of return.Risk-free rate of return.Positive rate of return.None of the answers above is correct. M9       Fixed costs are Those that vary with the level of output that the firm might produce.Contractual obligations of the firm.Invariant to external economic conditions.Those that do not vary with respect to different courses of action under consideration.More important in the short run than in the long run. M10     After stopping production of its only product, a firm’s total cost is Zero.Its total variable cost.Its total fixed cost.Its marginal cost.There is not enough information to answer. M11     In the short run, as a result of diminishing returns, Total output decreases.Both marginal product and marginal cost decrease.Marginal product increases and marginal cost decreases.Marginal product remains constant.Marginal product decreases and marginal cost increases. M12     A small firm can produce 10 industrial machines per month at an average total cost of $25,000 per unit. The firm’s total fixed cost is $100,000. The average variable cost of producing each machine is $35,000$25,000$250,000$350,000$15,000 M13     Whether one country has a cost advantage relative to another in a traded good depends on a.         Labor costs in the two countries. b.         Productivity (output of the good per worker) in the two countries. c.         The exchange rate between the countries’ currencies. d.         Demand conditions in the two countries. e.         Answers a, b, and c are all correct. M14     Quebec is capable of producing 10 pallets of wood shingles or 8 barrels of maple syrup per labor hour. Vermont is capable of producing 12 pallets of wood shingles or 12 barrels of maple syrup per labor hour. Vermont has an absolute advantage in both goods.Vermont will be expected to export both goods to Quebec.Quebec has a comparative advantage in wood shingles.Answers a and c are both correct.Answers a and b are both correct. M15     Constant returns to scale lead to Long-run marginal cost equal to long-run average cost (and both constant).Constant total cost.Rising long-run marginal cost.Constant profit per unit.A U-shaped long-run average cost curve. M16     The point of intersection between the LAC and LMC curves indicates The point of maximum profit.The largest possible plant size.The beginning of economies of scale.The plant size where LAC is a minimum.Answers a and d are both correct. M17     Specialization and division of labor lead to Diseconomies of scale.Economies of scale.Decreasing returns to scale.Diminishing returns.Increasing LAC. M18     The minimum efficient scale is The lowest output at which the firm can break even.The lowest output at which minimum long-run average cost can be achieved.The lowest fixed cost under which the firm can operate.The lowest variable cost for that level of production.The lowest output at which minimum short-run average cost can be achieved. M19     The minimum efficient scale for a typical firm in an industry is 2 million units. The estimated output for the whole industry is 6 million units. Therefore, the industry Is a natural monopoly.Is perfectly competitive.Is likely to support no more than 3 firms of efficient scale.Has insufficient demand to allow positive economic profits.Is likely to support a single dominant firm. M20     A firm experiences economies of scope when The cost of producing multiple goods is less than the aggregate cost of producing each item separately.The cost of producing an additional unit of output is falling.The cost of producing multiple goods is more than the cost of combining output in one production facility.The cost of producing an additional line of goods is less than the cost of the previous additional line of goods.All of the above answers are correct. M21     A firm maximizes profit by Producing where the average cost per unit is minimized.Raising price until revenue is maximized.Producing until marginal revenue equals marginal cost.Producing until marginal cost equals average cost.Producing until price equals average cost. M22     In the short run, the firm should continue to produce if and only if Price exceeds marginal cost.Marginal revenue equals marginal cost.Price exceeds average fixed cost.Price exceeds average variable cost.Price exceeds average total cost. M23     Allocating shared fixed costs among multiple products             a.         Justifies higher prices according to the optimal markup rule.             b.         Ensures that each product bears its fair share of fixed costs.             c.         Means a product should be discontinued if it fails to cover its allocated fixed cost.             d.         Is misleading and can lead to sub-optimal pricing and output decisions.             e.         Answers a, b, and c are all correct. Short Problems and Questions S1        A student forgoes her annual summer job (paying $3,200) in order to operate a sandwich shop.  Rent and other fixed costs are $1,500 for the season. Variable cost per unit is $.50. Derive equations for total economic cost and total accounting cost. S2        Carefully distinguish between the economist’s definition of profit and the accountant’s definition. Which one is superior for decision making? S3        Given the total cost equation: C = 32 + 2Q2, derive equations for a.         Average total cost. b.         Average variable cost. c.         Marginal cost. d.         Average fixed cost e.         What level of Q yields the minimum level of total average cost of production? S4        A shoe manufacturer is currently producing 100,000 pairs of shoes per year. The firm estimates overhead cost as $5.00 per unit of output and total variable cost as $2,200,000.  Assuming a linear function, derive the total cost equation for the firm. S5        Why is comparative advantage rather than absolute advantage the basis for trade? S6        Determine whether the following production functions are characterized by increasing, decreasing, or constant returns to scale. a.         Q = 5 + 2K + L b.         Q = 40KL c.         Q = 100K1/2L1/2 S7        Describe the conditions under which the LAC curve will be L-shaped. How would this situation affect production planning by a firm? S8        A high-tech firm produces a data processing service according to the production function Q = 2K + L. If the cost per hour of labor (L) and of machine time (K) is the same, what is the least-cost way to complete 100 data processing jobs? Will the firm ever use both inputs to complete processing jobs? S9        A firm estimates its total variable cost to be VC = Q3 – 100Q2 + 2,600Q. Compute the minimum price that the firm can receive without having to shut down in the short run. Longer Problems and Discussion Questions L1        The annual expenditures of a small tax accounting firm are: Rent ($15,000), Secretary’s Salary ($27,000), and Other Expenses ($8,000). The estimated number of tax returns per year is 750. Average processing cost per return is $160, and the average price charged per return is $300. The head of the firm has launched his solo practice after resigning from his $70,000-a-year job. Estimate the economic and accounting profit of the new enterprise and comment on the decision. L2        A producer of mobile phones has costs given by: C = 100,000 + 80Q, and faces the inverse demand curve: P = $160 – .01Q, where Q denotes weekly output and sales. a.         Find the firm’s optimal output, price, and profit.             b.         A key component of the phone is its specialized memory chip, which the firm produces for its own use and also sells to outside buyers. The chip’s selling price is $40 and its marginal cost is $20. In fact, the firm can produce and sell all (i.e., its full capacity) of its chips to outside buyers. What is the opportunity cost associated with chips? What is the true marginal cost of each cell phone? What are the firm’s optimal output and price? L3        Discuss the shape of the short-run average cost and marginal cost curves. Explain why the marginal cost curve intersects the average cost curve at the minimum of average cost. How does the shape of these cost curves affect production planning in the short run? L4        You are the production manager of a large plant, and are preparing a report for your superiors. Unfortunately, you have lost some of the numbers you wish to report. You have the data below. Complete the following table by computing the missing numbers from those that are given. QTotal CostVariable CostAverage CostMarginal Cost0$35   1   $52 $9  3  $15.67 4   $35   $46 $24  7 $30  8  $9 9  $8.89  L5        Carefully define increasing and decreasing returns to scale. How are increasing and decreasing returns to scale related to average cost?  L6       How are economies of scale different from economies of scope? How might a manager use these concepts in planning for the firm? What may limit their usefulness in actual decisions? L7        A farm equipment firm produces small tractors at total cost: C = 37,500,000 + 5,000Q + 1.5Q2, where Q denotes annual tractors output. Regional demand for small tractors is given by: P = 30,000 – Q. Determine the firm’s optimal output and price and its annual profit from tractors.Because of increased foreign competition, the demand for the firm’s tractors falls permanently to: P = 20,000 – Q. The firm is considering closing its plant immediately. By doing so, it can probably save $18 million of its annual $37.5 million in fixed costs. Alternatively, it can continue to operate the plant for 12 months after which if it shuts down it can walk away from its labor contracts and plant lease and incur no continuing costs. Determine its most profitable operating strategy. L8        A firm produces goods A and B. For good A, P = $2, AVC = $1.40, and QA = 50,000 units. For good B, P = $3, AVC = $2.20, and QB = 75,000 units. The firm’s total fixed costs come to $100,000. a.         Find the profit contribution for each good. b.         At current output levels, the firm allocates its fixed cost: $.50 per unit to A and $1.00 per unit to B. Should the firm continue to produce both goods in the short run? In the long run? L9        Economic commentators have sometimes accused Japanese firms of undercutting foreign rivals by selling at prices below cost. One response, especially from high-tech firms, is that the companies rely on the learning curve to reduce costs, so that what may appear to be operating at a loss is, in fact, long-run profit maximization. Output levels of specific product lines may increase at a 50% annual rate for several years. Can selling at rock-bottom prices be a reasonable strategy for high-tech firms? How can pricing below average cost ever be a profit-maximizing strategy? Explain

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