A firm faces the following costs: total cost of capital = $1,500; price paid for
ID: 2495787 • Letter: A
Question
A firm faces the following costs: total cost of capital = $1,500; price paid for labor = $12 per labor unit; and price paid for raw materials = $4 per raw-material unit.
Instructions: In parts a and b, round your answers to 2 decimal places. In part c, enter your answer as a whole number.
a. Suppose the firm can produce 5,500 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 5,500 units of output?
TC = $.
ATC = $.
b. Now assume the firm improves its production process so that it can produce 6,500 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 6,500 units of output?
TC = $.
ATC = $.
c. If units of output can always be sold for $1 each, then by how much does the firm’s profit increase after it improves its production process? $.
d. Suppose that implementing the improved production process would require a one-time-only cost of $1,100.
If the firm only considers this year’s profit, would the firm implement the improved production process? (Click to select)YesNo.
What if the firm considers its profit not just this year but in future years as well? (Click to select)NoYes.
Explanation / Answer
a. Suppose the firm can produce 5,500 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 5,500 units of output?
TC = Total cost = $6,000;
average total cost = $1.09 (= $6,000/5,500 units);
b. Now assume the firm improves its production process so that it can produce 6,500 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 6,500 units of output?
TC = $ 6000
ATC = $.92 (= $6,000/6,500 units);
c. If units of output can always be sold for $1 each, then by how much does the firm’s profit increase after it improves its production process?
$1500
d. Suppose that implementing the improved production process would require a one-time-only cost of $1,100.
No. Yes
If the firm only considers this year’s profit, would the firm implement the improved production process?
Yes. Process innovation can lower the average total cost of producing a particular output, meaning that society uses fewer resources to produce a given amount of output
What if the firm considers its profit not just this year but in future years as well? (Click to select
No. But need to exercise with caution
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