ECO/365 WEEK 3 HOMEWORK
1. Sally is considering opening her own beauty salon. She anticipates the following costs/year:
Furniture: | $20,000 |
Equipment: | $14,000 |
Rent: | $12,000 |
Coloring products: | $6,000 |
Styling products: | $4,000 |
Additionally, Sally is withdrawing $34,000 from her savings account that pays 4% interest/year to purchase the furniture and equipment; she will quit her current job that pays $25,000 per year. She expects total revenues from the new business in the first year to be $70,000. Calculate the following:
a. Explicit costs (list the items and amounts).
* Furniture $20,000
* Equipment $14,000
* Rent $12,000
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What are fixed costs? Cost that are spent and cannot be changed associated with a specific period of time.
b. What are variable costs of producing 5 units? $78
c. What is average total cost of producing 3 units? $14.33
d. What is average fixed cost of producing 4 units? $0
e What is the marginal cost of producing the 2nd unit? $8.00
f. What is average variable cost of producing 1 unit? $15.00
4. Explain why as output in increases, average total cost initially decreases but then increases. Eventually the law of diminishing productivity sets in. As productivity decreases cost rise.
5. State whether the following firms are experiencing economies of scale or diseconomies of scale.
a. West Company can produce 1,500 units at an average total cost of $2.50 or 1,800 units at an average total cost of $2.55. Economies of scale, cost per unit is lower
b. North Company can produce 500,000 units at a total cost of $220,000 or 600,000 units at a total cost of $250,000. Economies of scale
c. Iams can produce 10,000 bags of dog food at a total cost of $150,000. If they increase their production by 7%, total costs will rise by 3%. Economies of scale
6. Given the marginal cost...