Sea lions have been depleting the stock of steelhead trout. One idea to scare se
ID: 1225815 • Letter: S
Question
Sea lions have been depleting the stock of steelhead trout. One idea to scare sea lions off the Washington state coast was to launch fake killer whales, predators of sea lions. The cost of making the first whale is $19,000—$8,000 for materials and $11,000 for the mold. The mold can be reused to make additional whales, so additional whales would cost $8,000 apiece. a. Make a table showing the total cost and average total cost of producing 1 to 10 fake killer whales. b. Does production of fake whales exhibit diseconomies of scale, economies of scale, or constant returns to scale? c. What is the fixed cost of producing fake whales? d. What is the variable cost of producing fake whales?
Explanation / Answer
(a)
The material cost of $8,000 per whale is average variable cost (AVC) and $11,000 is fixed cost (FC).
Total cost (TC) = TVC + FC [where TVC = AVC x Q = $8,000 x Q]
TC = $8,000 x Q + $11,000
Average total cost (ATC) = TC / Q
(b) There is economies of scale since ATC is continuously falling with increase in output.
(c) Fixed cost = $11,000 (Cost of mold)
(d) Variable cost per unit = $8,000 (material cost)
Q FC TVC TC ATC 1 11,000 8,000 19,000 19,000.00 2 11,000 16,000 27,000 13,500.00 3 11,000 24,000 35,000 11,666.67 4 11,000 32,000 43,000 10,750.00 5 11,000 40,000 51,000 10,200.00 6 11,000 48,000 59,000 9,833.33 7 11,000 56,000 67,000 9,571.43 8 11,000 64,000 75,000 9,375.00 9 11,000 72,000 83,000 9,222.22 10 11,000 80,000 91,000 9,100.00Related Questions
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