Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
...with which, we can easily pinpoint in the prompt a Total Costs value of $10,000...
Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
$10,000= Fixed Costs + Variable Costs
...and a Variable Costs value of $8,000...
Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
To compute Average Total Cost (ATC), we'll use the following formula:
ATC = Total Cost / Quantity
From here, we can pinpoint a Total Cost value of $10,000 in the prompt...
Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
ATC = $10,000 / Quantity
...for a quantity of 800 units (crewnecks).
Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
ATC = $10,000 / 800
Which, when we solve, results in an ATC of $12.50.
ATC = $10,000 / 800 ATC = $12.50
This serves as our final answer!
Answer: $12.50
Question #3: Dylan’s average variable cost was ___ per crewneck.
To compute Average Variable Cost (AVC), we'll use the following formula:
AVC = Variable Costs / Quantity
From here, we can pinpoint a Variable Costs value of $8,000 in the prompt...
Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
AVC = $8,000 / Quantity
...for a quantity of 800 units (crewnecks).
Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
AVC = $8,000 / 800
Which, when we solve, results in an AVC of $10.
AVC = $8,000 / 800 AVC = $10
This serves as our final answer!
Answer: $10
Question #4: Dylan’s average fixed cost was ___ per crewneck.
For Quantity, we'll place 800 (since Dylan produced 800 crewnecks).
Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks.
AFC = $2,000 / 800
Which, when we solve, results in an AFC of $2.50.
AFC = $2,000 / 800 AFC = $2.50
This serves as our final answer!
Answer: $2.50
Question #5: Dylan will make a profit if his price is set at ______.
We touched on this a little bit in Question #5, but to restate: the Average Total Cost (ATC) is the breakeven point at which a sale results in (A) profit or (B) loss.
We proved that in Question #5 when we solved for the profit at a price above $12.50...
Considering we can calculate profit with the following equation...
Profit = Total Revenue - Total Cost
...we can determine Total Revenue by multiplying the price the crewnecks were sold at ($12.50 in this case) by the number of units sold...
Total Revenue = Price x Quantity Total Revenue = $12.50 x 800 Total Revenue = $10,000
...and plug it into our Profit equation like so...
Profit = $10,000 - Total Cost
...and then determine the Total Cost by multiplying the Average Total Cost (ATC) of each crewnecks sold by the number of units sold...
Total Cost = ATC x Quantity Total Cost = $12.50 x 800 Total Cost = $10,000
...and plug it into our Profit equation like so...
Profit = $10,000 - $10,000
...resulting in zero profit!
Profit = $10,000 - $10,000 Profit (zero) = $0
This enables to rest easy with our answer as $12.50 (a.k.a. ATC)!
Answer: $12.50
Use the following information to answer Questions 8-11: Dylan's business grew from 2022 to 2023. In 2023, he experienced the following costs in the table below.
Output
AFC
AVC
ATC
MC
1
$10
$10
$20
-
2
$5
$12
$17
14
3
$3.33
$13
$16.33
15
4
$2.50
$15
$17.50
21
Question #8: The total variable cost of producing 3 units is __________.
Remember: the profit maximizing point for any firm is where MR = MC!
We can pinpoint this point here on our graph...
...which aligns to 4 units of output.
Answer: $???, 4 units
Now... how can we identify price?
Don't make the mistake of going directly to the left from the point where MR = MC!! We've gotta go up to the demand (D) curve...
...and then to the left to pinpoint our price of $30! This results in our final answer!
Answer: $30, 4 units
The reason we go up to the demand (D) curve is because that's the price that our consumers are willing to pay (at 4 units of output). If we set our price to anything less that what consumers were willing to pay... we'd be missing out on profit!
Question #13: At this profit maximizing point, the firm's total costs are _____________.
In Question #14, we solved for the total revenue here...
...and in Question #13, we solved for the total costs here...
...therefore, visually we can see the total profit here...
...which makes sense, as this aligns to the area above ATC and below price...
...which, when we compute mathematically, equals $60 as expected!
Profit = (P - ATC) x Quantity Profit = ($30 - $15) x 4 Profit = $60
This serves as our final answer!
Answer: $60
Implicit vs. explicit costs
Question #16: One of your roommates runs a small nail salon out of your dorm room. Her total costs are $300 and her implicit costs are $200. What are her explicit costs?
We can lean on the equation for economic costs here...
Economic Costs = Explicit Costs + Implicit Costs
In this situation, the question tells us that the total (economic) costs are $300...
Question #16: One of your roommates runs a small nail salon out of your dorm room. Her total costs are $300 and her implicit costs are $200. What are her explicit costs?
$300 = Explicit Costs + Implicit Costs
...and the implicit costs are $200...
Question #16: One of your roommates runs a small nail salon out of your dorm room. Her total costs are $300 and her implicit costs are $200. What are her explicit costs?
$300 = Explicit Costs + $200
...therefore, resulting in an explicit costs value of $100!
Remember: When working in markets of competitive firms, in the long-run they operate at zero economic profits.
This means that if in the short-run firms are making profit, other competitors will enter the market to get in on that profit! Over time as more and more competitors enter the market, the economic profits return back to zero.
That's why we choose answer choice A!
Question #18: Based on Question #17, we can expect the supply curve to shift to the ____________.
We skimmed over this in Question #19, but let's revisit it: in competitive markets, they make zero profit in the long-run.
This can be mainly attributed to the fact that competitive markets have (1) low barriers to entry, (2) make identical products, and (3) consumers are indifferent to which producer they choose to buy from.
Over the long-run, these 3 characteristics, result in the long-run profit equaling zero. Firms will enter / exit the market until there's no more economic profit to reap!
This correlates to answer choice B!
Question #20: Competitive firms are price __________.
Competitive firms enter markets in which they produce identical products to all the other firms already in the market. There's very little they can do to differentiate themselves from their competition!
And without that differentiation... there'd be very little reason for consumers to pay more for their product than their competitor producing the same thing down the street!
Monopolies, on the other hand, have much higher barriers of entry, resulting in no competitors being able to come into their market and produce a similar / identical good.
Consumers must go to the monopoly and only the monopoly to get their product... giving the monopoly power in setting whatever price they choose!
Thus, monopolies are price makers!
Question #22: Competitive firms should produce where _____________.
The profit maximizing point for any firm is where MR = MC!
Think about it:
If your MR > MC, that means that the revenue (MR) gained for one more unit sold is greater than the cost (MC) of producing that good... so you'd make more money selling another unit!
If your MR < MC, that means that the revenue (MR) gained for one more unit sold is less than the cost (MC) of producing that good... so you'd lose money selling another unit!
You might be wondering: don't competitive firms make zero profit in the long-run? Do they still produce where MR = MC?
Yes, they do!
It's just that in the long-run for competitive firms, the ATC ends up equaling where MR = MC, resulting in zero economic profit!
Question #23: Monopolies should produce where _____________.
The profit maximizing point for any firm is where MR = MC!
Same principle as last question's explanation...
If your MR > MC, that means that the revenue (MR) gained for one more unit sold is greater than the cost (MC) of producing that good... so you'd make more money selling another unit!
If your MR < MC, that means that the revenue (MR) gained for one more unit sold is less than the cost (MC) of producing that good... so you'd lose money selling another unit!
Different from competitive markets, monopolies are typically able to reap some short & long run profit by operating at MR = MC!
Question #24: You are the consultant for a well-known monopoly. You come to find out that their current marginal cost is $20 and their marginal revenue is $35, so you recommend that they ______________.
A) They should continue production at the same quantity B) They should shut down entirely C) They should produce more D) They should produce less
A) They should continue production at the same quantity B) They should shut down entirely C) They should produce more D) They should produce less
Think about it this way: the cost of producing one more unit of product (a.k.a. the marginal cost, or MC) is $20.
Question #24: You are the consultant for a well-known monopoly. You come to find out that their current marginal cost is $20 and their marginal revenue is $35, so you recommend that they ______________.
That's less than the revenue of selling one more unit of product (a.k.a. the marginal revenue, or MR), which is $35.
Question #24: You are the consultant for a well-known monopoly. You come to find out that their current marginal cost is $20 and their marginal revenue is $35, so you recommend that they ______________.
In other words... we can make $35 - $20 = $15 in profit by selling one more unit!
So... why miss out on that profit?? The firm should produce more to gain that profit! Otherwise, they're missing out on profit sitting right in front of them!
This correlates to answer choice C!
A) They should continue production at the same quantity B) They should shut down entirely C) They should produce more D) They should produce less
