Fixed explicit costs (annually): · Technology (Web design and maintenance) $5,00
ID: 1130875 • Letter: F
Question
Fixed explicit costs (annually):
· Technology (Web design and maintenance) $5,000
· Postage and handling $1,000
· Miscellaneous $5,000
· Equipment $4,000
· Overhead $1,000
TOTAL Explicit Fixed Costs (annual) $16,000
Fixed implicit costs (annually):
· Lost wages from job given up (annual) $50,000
Variable cost = $20 per book.
Part 1:
Assume that the equation for demand is Q = 40,000 – 500P, where
· Q = the number of cookbooks sold per year
· P = the retail price of books
Using the information above, fill in the following chart (note that quantity is just the solution of the demand curve above; the first two lines of the table have been completed for you – you need to complete all other lines in the table):
Price
Quantity
Elasticity
Total Revenue
Total Cost
Economic Profit
$10
35,000
---
$350,000
$766,000
-$416,000
$15
32,500
0.1852
$487,500
$716,000
-$228,500
$20
$25
$30
$35
$40
$45
$50
$55
$60
$65
$70
Indicate the maximum profit price and quantity by highlighting those particular values with red font.
Part 2:
After you complete the chart (either fill in the empty boxes in the table above or create an Excel file), copy and paste the table into a Word file. This table should be at the top of your assignment. Then answer the following questions (based on the chart and your understanding of this material) in 600-800 words:
1. Why, according to an economist, should implicit costs (i.e., lost wages from job given up) be included in the total cost of your product to compute economic profit?
2. Why does price elasticity of demand change as you move up the demand curve (more specifically, as the price of the product increases)?
3. Explain in your own words why MR = MC produces maximum profit for a company.
Price
Quantity
Elasticity
Total Revenue
Total Cost
Economic Profit
$10
35,000
---
$350,000
$766,000
-$416,000
$15
32,500
0.1852
$487,500
$716,000
-$228,500
$20
$25
$30
$35
$40
$45
$50
$55
$60
$65
$70
Explanation / Answer
Part A
Price $
Quantity = 40,000-500*P
elasticty e
TR $
TC $
Economic Profit $
10
35,000
350,000
766,000
- 416,000
15
32,500
-0.1429
487,500
716,000
- 228,500
20
30,000
-0.2308
600,000
666,000
- 66,000
25
27,500
-0.3333
687,500
616,000
71,500
30
25,000
-0.4545
750,000
566,000
184,000
35
22,500
-0.6000
787,500
516,000
271,500
40
20,000
-0.7778
800,000
466,000
334,000
45
17,500
-1.0000
787,500
416,000
371,500
50
15,000
-1.2857
750,000
366,000
384,000
55
12,500
-1.6667
687,500
316,000
371,500
60
10,000
-2.2000
600,000
266,000
334,000
65
7,500
-3.0000
487,500
216,000
271,500
70
5,000
-4.3333
350,000
166,000
184,000
Entire calculation:
Price $
Quantity = 40,000-500*P
% change in Q
% change in P
elasticity e
10
35,000
15
32,500
-7.14
50
-0.1429
20
30,000
-7.69
33.33
-0.2308
25
27,500
-8.33
25.00
-0.3333
30
25,000
-9.09
20.00
-0.4545
35
22,500
-10.00
16.67
-0.6000
40
20,000
-11.11
14.29
-0.7778
45
17,500
-12.50
12.50
-1.0000
50
15,000
-14.29
11.11
-1.2857
55
12,500
-16.67
10.00
-1.6667
60
10,000
-20.00
9.09
-2.2000
65
7,500
-25.00
8.33
-3.0000
70
5,000
-33.33
7.69
-4.3333
TR $ = P*Q
TFC $
Fixed Implicit cost $
TVC $
TC $ = TFC +FIC
Economic Profit $ = TR - TC
350,000
16,000
50,000
700,000
766,000
- 416,000
487,500
16,000
50,000
650,000
716,000
- 228,500
600,000
16,000
50,000
600,000
666,000
- 66,000
687,500
16,000
50,000
550,000
616,000
71,500
750,000
16,000
50,000
500,000
566,000
184,000
787,500
16,000
50,000
450,000
516,000
271,500
800,000
16,000
50,000
400,000
466,000
334,000
787,500
16,000
50,000
350,000
416,000
371,500
750,000
16,000
50,000
300,000
366,000
384,000
687,500
16,000
50,000
250,000
316,000
371,500
600,000
16,000
50,000
200,000
266,000
334,000
487,500
16,000
50,000
150,000
216,000
271,500
350,000
16,000
50,000
100,000
166,000
184,000
Price $
Quantity = 40,000-500*P
TR $
TC $
MR
MC
10
35,000
350,000
766,000
15
32,500
487,500
716,000
-55
20
20
30,000
600,000
666,000
-45
20
25
27,500
687,500
616,000
-35
20
30
25,000
750,000
566,000
-25
20
35
22,500
787,500
516,000
-15
20
40
20,000
800,000
466,000
-5
20
45
17,500
787,500
416,000
5
20
50
15,000
750,000
366,000
15
20
55
12,500
687,500
316,000
25
20
60
10,000
600,000
266,000
35
20
65
7,500
487,500
216,000
45
20
70
5,000
350,000
166,000
55
20
A firm will always maximize profits where the marginal revenue equals the marginal cost. In the above table, the firm will continue to increase output up to the point where the marginal cost is equal to the marginal revenue, which in our table occurs at 12,500 units of output. If this frim produces 15000 units, the MC will be higher than the MR.
Explanations for all the columns in table below starting from Left to right:
Price = given in the question
Quantity = put the value of price in the demand function given
Q = 40000 – 500P
For example, P = 10, Q = 40000-500*10 = 35000
P = 15, Q = 40000-500*15 = 32500
Drag the formula, 30000, 27500 and so on….
Elasticity e = % change in quantity demand / % change in Price
To calculate % change in quantity demand for Q 32500 = (32500/35000-1)*100 = -7.14 and drag the formula
To calculate % change in Price for Q 32500 = (15/10-1)*100 = 50 and drag the formula
E = -7.14 / 50 = -0.1429
TR = total Revenue = P*Q = 10*35000 = 350000 and so on
TC = Total fixed cost + Fixed implicit cost + Variable cost
Total Variable cost = 20*Q for every row so first row = 20*35000 = 700000 and then 20*32500=650000
And so on
TFC is given and it will remain same for all the rows
TC = 16000 + 50000 + 700000 = 766000 for first row and then drag
Economic Profit $ = TR - TC
We have TR and TC
MR for Q at 32500 = (487500-350000) / (32500-35000) = -55
Now drag formula
MC for Q at 32500 = (716000-766000) / (32500-35000) = 20
Now drag formula
Part 2:
After you complete the chart (either fill in the empty boxes in the table above or create an Excel file), copy and paste the table into a Word file. This table should be at the top of your assignment. Then answer the following questions (based on the chart and your understanding of this material) in 600-800 words:
1. Why, according to an economist, should implicit costs (i.e., lost wages from job given up) be included in the total cost of your product to compute economic profit?
First, we should know that Economic profit (EP) is the profit that a firm gets after deducting all its costs.
EP = Explicit costs + Implicit costs
Explicit costs are the compulsory cost of a firm for example wages, salaries rent etc that a firm pays directly.
Implicit costs are the opportunity cost of resources already owned by the firm. Here lost wages from job given up should be included as it is an opportunity cost to a firm and it may have an indirect effect on the business.
2. Why does price elasticity of demand change as you move up the demand curve (more specifically, as the price of the product increases)?
Since we have downward sloping demand curve (Q = 40000 – 500*P) it says that price and quantity move in opposite direction. When the price of the product increases, the demand for the quantity falls. Price elasticity of demand measures the responsiveness of change in quantity demanded to the change in price of the product. The elasticity of demand between two points, say A and B, on the demand curve would be
Price elasticity of demand = % change in quantity demand / % change in price
This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by xx%.
In our example, when the price rises from 20 to 25, quantity demand falls from 30000 to 27500.
% change in quantity demand = -8.33 and % change in price = 25
E = - 8.33/25 = -0.3333
Absolute value of e = 0.33
Since it is less than 1, the demand is inelastic.
This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by 0.33%.
3. Explain in your own words why MR = MC produces maximum profit for a company.
By definition, MR is the revenue gained by producing one extra unit of output and MC is the cost of producing one extra unit of output. Each firm wants to make positive profit.
MR = MC produces maximum profit for a company because up to this point, every unit produced has marginal revenue greater than marginal cost. After this point, MR starts declining and MC starts increasing which means the cost of producing each extra unit becomes burden to the firm and profit will turn negative (loss).
If a firm finds that MC>MR, it means the last extra unit produced has added more to the total cost and not in revenue. By reducing one unit of output, it can increase profit because it saves more costs.
Price $
Quantity = 40,000-500*P
elasticty e
TR $
TC $
Economic Profit $
10
35,000
350,000
766,000
- 416,000
15
32,500
-0.1429
487,500
716,000
- 228,500
20
30,000
-0.2308
600,000
666,000
- 66,000
25
27,500
-0.3333
687,500
616,000
71,500
30
25,000
-0.4545
750,000
566,000
184,000
35
22,500
-0.6000
787,500
516,000
271,500
40
20,000
-0.7778
800,000
466,000
334,000
45
17,500
-1.0000
787,500
416,000
371,500
50
15,000
-1.2857
750,000
366,000
384,000
55
12,500
-1.6667
687,500
316,000
371,500
60
10,000
-2.2000
600,000
266,000
334,000
65
7,500
-3.0000
487,500
216,000
271,500
70
5,000
-4.3333
350,000
166,000
184,000
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