Q output TC TFC TVC ATC MC AVC AFC 0 100 1 190 2 270 3 340 4 400 5 470 6 550 7 640 8 750 9 880 10 1030 11 1200 Original Technique Q output TC TFC TVC…

Q output

TC

TFC

TVC

ATC

MC

AVC

AFC

0

100

1

190

2

270

3

340

4

400

5

470

6

550

7

640

8

750

9

880

10

1030

11

1200

Original Technique

Q output

TC

TFC

TVC

ATC

MC

AVC

AFC

0

150

1

230

2

300

3

360

4

435

5

515

6

600

7

695

8

800

9

915

10

1045

11

1195

12

1385

Cost Structures & Business Decisions

This assignment is designed to challenge your ability to understand realistic cost structures and make profit-maximizing decisions with them. I have included below two costs structures, one that corresponds with an original technique of production another with a new (“challenger”) technique of production. 

Given the output versus cost data in the first two columns of the spreadsheet, complete the costs table for both techniques of production. Your responses to the remaining questions will be based upon that data. 

Assume that these are the two most efficient techniques of production available, so that we can simply compare what the two competing techniques offer us. 

1. What is the minimum average total cost of the Challenger technique?
2. The Challenger technique offers its minimum average total cost when output is _____.
3. What is the minimum average total cost of the Original technique?
4. The Original technique offers its minimum average total cost when the level of output is _____.

Now assume a short-run situation where there are a number of different firms using each technique of production, and they are competing within the same industry. The quality of the product is completely standardized; these firms compete only on the basis of how cheaply they can produce it. They can sell output at $94 per unit. 

1. Firms using the Original technique of production will maximize profit or minimize loss at $_____ by producing at level of output = ________.
2. Firms using Challenger technique of production will maximize profit or minimize loss at $______ by producing at level of output = ________.

Now consider the long-run situation remembering that positive profits will attract more competitors to the industry and losses will repel firms from the industry.

1. Why will one technique of production prevail over the other?
2. How low will price need to fall before firms using the less efficient technique of production will go out of business in the long-run? Answer with a number: $_____________
3. Ultimately, when all market adjustment is complete, what will be the price in this market? Answer with a number: $_____________
4. Why will the market’s price adjustment stop at the price you identified in question #9?

TIPS:

Graphing the spreadsheet data may help you make decisions and see how the different types of costs are related, but it is not necessary to graph the data nor to submit the completed spreadsheets. Your responses to the questions are all that is needed. 

Graphing (accurately) all costs for just one technique of production -the original one- will allow you to get partial credit even if your answers are not all correct. You may submit graphs simply by using graph paper and taking a picture of your completed work. If you wish to do this, graph only ONE technique’s costs, and graph “totals” on one graph and “averages and marginal” on another that is scaled more appropriately.

Note: This assignment requires no research. It is based upon a sound comprehension of costs of production and the assumptions involved with the purely competitive model. The final two questions relate to Pure Competition in the LONG-RUN.

 

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