Economic Problems -content– Problem 1 American Ball Co. (ABC) is a rubber ball manufacturer. It has monthly fixed costs of $2,000,000. Its marginal costs are $1.00 per ball. • What happens if sales fall by 20% from 2,000,000 to 1,600,000 balls per month? • What happens to average fixed costs (AFC) per widget and the marginal costs per ball? • If sales fall by 20 percent from 2 million balls per month to 1,600,000 balls per month, what happens to the AFC per ball, the MC per paper, and to the minimum amount that you must charge to break even on these costs? Hint: Here Marginal Cost (MC) is constant, which implies that Average Variable Cost (AVC) is constant and equals MC. This does not imply Average Total Cost (ATC) is constant or has to equal MC. Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC). Divide through by the quantity Q, which implies TC/Q = FC/Q + VC/Q. This gives us ATC = AFC + AVC. Problem 2 Consult the chart below to solve the following questions. TotalProduct AverageFixed Cost AverageVariableCost AverageTotalCost MarginalCost 0 45 1 $60.00 $45.00 $105.00 40 2 30.00 42.50 72.50 35 3 20.00 40.00 60.00 30 4 15.00 37.50 52.50 35 5 12.00 37.00 49.00 40 6 10.00 37.50 47.50 45 7 8.57 38.57 47.14 55 8 7.50 40.63 48.13 65 9 6.67 43.33 50.00 65 10 6.00 46.50 52.50 • 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 loss-minimizing output? What economic profit or loss will the firm realize per unit of output? • Answer the questions above for a product price of $41. • Answer the questions above for a product price of $32. Problem 3 A firm in a purely competitive industry is currently producing 2000 units per day at a total cost of $900. If the firm produced 1600 units per day, its total cost would be $600, and if it produced 1000 units per day, its total cost would be $550. • What is the firm’s ATC per unit at these three levels of production? • If every firm in this industry has the same cost structure, is the industry in the long-run competitive equilibrium? • From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long‐run equilibrium? If this price was the market price and if the normal rate of profit is 10%, what will each firm’s accounting profit be (per unit)? PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A GOOD DISCOUNT

2016-09-21