UNIVERSITY OF CENTRAL PUNJAB, Lahore.

MBA, Fall 2011

Assignment#2
Resource Person: Syeda Hameeda Batool Name: Due Date: 5th Jan 12 ID#

Managerial Eoconomics Section F

COST / Production ANALYSIS In the accompanying table, we list cost figures for a hypothetical firm. We assume that the firm is selling in a perfectly competitive market. Fill in all the blanks. Output (units) Fixed Cost Average Variable Average Cost Variabl Fixed e Cost Cost (AFC) (AVC) $100 $40 $40 50 35 70 33.33 25 20 60.67 180 250 330 120 40 45 50 55 Total Cost Average Total Costs (ATC) $140 85 73.33 70 70 71.67 Marginal Cost (MC) $ 30 50 60 70 80

1 2 3 4 5 6
A.

100 100 100 100 100 100

$ 140 170 220 280 350 430

How low would the market price of its output have to go before the firm would shutdown in the short run? The price is not gives so taking Q = 6, Avc = 55. Putting 6 = 100 / P 55 P = 71.66

B. If the price of its output were $76, what rate of output would the firm produce, and how much profit would it earn? Q = 100 / 76 55 Q = 4.76 Profit

Q = (TFC + Profit) / P AVC 4.76 = (100 profit) / 76 55 Profit = - 0.04 (which is a loss) C. What is the price of its output at which the firm would just break even in the short run? (This is the same price below which the firm would go out of business in the longrun.) What output would the firm produce at that price? Breakeven actually come where AVC is greater than price but here price is greater than AVC, it means that firms output covers some cost so breakeven quantity is 4.76 and price is 76. Mr. Ahmed, manager of university caf, is contemplate keeping open his caf until 11:00pm. In order to do so, he would have to hire additional workers. He estimates the following total output. If the price of each unit of output is Rs.10 and each worker must be paid Rs. 40 per day, how many workers should Mr. Ahmed hire? Workers Total Output MP P MRP(L) MR(C) Hire 0 0 0 10 0 0 1 12 12 10 120 40 2 22 10 10 100 40 3 30 8 10 80 40 4 36 6 10 60 40 5 40 4 10 40 40 6 42 2 10 20 40

Based on the following table, Outpu Price Total Costs t 0 $10 $30 1 10 40 2 10 45 3 10 48 4 10 55 5 10 65 6 10 80 7 10 100 8 10 140 9 10 220 10 10 340

TR 0 10 20 30 40 50 60 70 80 90 100

MR 0 10 10 10 10 10 10 10 10 10 10

MC 30 10 5 3 7 10 15 20 40 80 120

a) What is the profit-maximizing output? Profit maximization where MR = MC but here at 2 places where MR = MC, at output 1 & 5, now we can see where cost and loss is minimum at Q1 and TR is 10, but TC is 40, it means loss is 30, but at Q 5 TR = 50 and TC = 65, here 15 is loss. So output 5 is over profit is maximizing output. b) How would your answer change if, in response to an increase in demand, the price of the good increased to $15? Now the price of good increase 15 $ / unit so at this price what is our profit maximize output

A firm's cost curves are given by the following table: Q TC 0 $100 1 130 2 152 3 160 4 172 5 185 6 210 7 240 8 280 9 330 10 390 Complete the table TFC $100 100 100 100 100 100 100 100 100 100 100 VC 0 30 52 60 72 85 110 140 180 230 290 AVC 0 30 26 20 18 17 18.3 20 22.5 25.5 29 ATC 0 130 76 53.3 43 37 35 34.2 35 36.6 39 MC 0 30 22 8 12 13 25 30 40 50 60

a) Graph AVC, ATC and MC on the same graph. What is the relationship between the MC curve and ATC?

b) Suppose that market price is $ 30. How much will the firm produce in the short run? How much are total profits? Show them on graph. Price is 30 AVC = 20, where Q is 3 Q = 100 \ 30 20 Q = 10 So profit is 0 c) Suppose that market price is $50. How much will the firm produce in the short run? What are total profits? Show them on the graph. AVC = 30 Q=1 TFC = 100 SO Q = 100 \ 50 30 Q=5 Profit = 0 d) Suppose that market price is $10 and AVC is 5. How much would the firm produce in the short run? What are total profits? Show them on the graph. P = 10 AVC = 5 TFC = 100 Q = 100 \ 10 5 Q = 20 Profit = 0 Here the firm faces loss, not profit.