A computer company produces affordable, easy-to-use home...

A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \$250. The marginal cost of producing computers is $\$ 700$ for the first computer, $\$ 250$ for the second, $\$ 300$ for the third, $\$ 350$ for the fourth, $\$ 400$ for the fifth, $\$ 450$ for the sixth, and $\$ 500$ for the seventh. a. Create a table that shows the company's output, total cost, marginal cost, average cost, variable cost, and average variable cost. b. At what price is the zero-profit point? At what price is the shutdown point? c. If the company sells the computers for $\$ 500,$ is it making a profit or a loss? How big is the profit or loss? Sketch a graph with $\mathrm{AC}, \mathrm{MC},$ and $\mathrm{AVC}$ curves to illustrate your answer and show the profit or loss. d. If the firm sells the computers for $\$ 300,$ is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \$250. The marginal cost of producing computers is $\$ 700$ for the first computer, $\$ 250$ for the second, $\$ 300$ for the third, $\$ 350$ for the fourth, $\$ 400$ for the fifth, $\$ 450$ for the sixth, and $\$ 500$ for the seventh.
a. Create a table that shows the company's output, total cost, marginal cost, average cost, variable cost, and average variable cost.
b. At what price is the zero-profit point? At what price is the shutdown point?
c. If the company sells the computers for $\$ 500,$ is it making a profit or a loss? How big is the profit or loss? Sketch a graph with $\mathrm{AC}, \mathrm{MC},$ and $\mathrm{AVC}$ curves to illustrate your answer and show the profit or loss.
d. If the firm sells the computers for $\$ 300,$ is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

Key Concepts

Shutdown Point

The shutdown point is the level of output or price at which a firm’s revenue fails to cover its variable costs. Below this point, it is more economical for the firm to temporarily cease production rather than operate at a loss, as continuing to produce would exacerbate losses beyond fixed cost commitments.

Zero-Profit Point

The zero-profit point is the output level at which total revenue exactly equals total cost, meaning the firm is not earning an economic profit (nor incurring a loss). Determining this point helps businesses in setting prices that cover all their costs, both fixed and variable.

Average Variable Cost

Average variable cost is the total variable cost divided by the number of units produced. This measure allows a firm to assess how variable cost per unit behaves with changes in output and is particularly useful in assessing short-run decisions regarding production levels.

Average Cost

Average cost, also known as unit cost, is computed by dividing the total cost by the number of units produced. It shows the cost per unit and is used to determine the efficiency of production and to compare costs across different levels of output.

Marginal Cost

Marginal cost is the additional cost incurred by producing one extra unit of output. It reflects how total cost changes as output is increased by one unit. Marginal cost analysis is crucial for determining the profit-maximizing level of output and for establishing pricing strategies.

Total Cost

Total cost is the sum of fixed costs and variable costs for a given level of production. It represents the complete cost incurred in producing a certain number of units. Analyzing total cost helps in understanding the cost structure and in making production decisions.

Variable Costs

Variable costs change in direct proportion to the level of output. They include costs that increase as more units are produced, such as materials or direct labor. In cost tables, variable costs are computed for each level of output and then aggregated to form the total variable cost.

Fixed Costs

Fixed costs are expenses that do not vary with the level of production. They remain constant regardless of the number of computers produced, such as rent or salaries. In cost analysis, fixed costs are added to variable costs to determine the total cost at different production levels.

Transcript

00:06 So firstly, total cost is equal to, so in this we are going to study the total cost, fixed cost, variable cost, marginal cost, average cost and average variable cost for a perfectly competitive firm.

00:18 Total cost is equal to fixed cost plus variable cost, average cost is equal to total cost divided by quantity, average variable cost is equal to variable cost divided by quantity and marginal cost is equal to change in total cost divided by change in quantity.

00:33 Now first case is we have to fill the table.

00:36 We have fixed cost which is 250 for all units of output.

00:40 Then we have marginal costs which is given over here.

00:44 Then we have total cost.

00:46 Total cost and marginal cost for first unit of output is same.

00:49 For second unit the total cost will be 700 plus 250, that is 950.

00:54 For third unit, 950 plus 300 that is 1250.

00:57 Similarly for fourth unit 1250 plus 350 and we get 1600 and we'll find total.

01:03 Cost for all units of output for variable cost what we will do we will deduct the fixed cost from total cost that is 700 minus 250 will be the variable cost the 950 minus 250 equal to 700 will be the variable cost for second unit similarly for other units of output now when we come to average cost average cost is total cost divided by 1 that is 700 that is 700 divided by 1 we get 700 then then we have 950 divided by 2 we have 475 then we have 1 to 5 0 divided by 3 we have 416 similarly we will find for other units of output and average variable cost is variable cost divided by the quantity that is 450 divided by 1 450 700 divided by 2 350 1 ,000 divided by 3 33 so we find average variable cost for all units of output now shutdown point shutdown point is the minimum average variable cost so so this is the shutdown point.

02:05 So whenever the price is greater than or equal to minimum average variable cost, the firm will keep on producing.

02:12 So the minimum average variable cost is 333 .33.

02:16 So this is the minimum average variable cost.

02:20 So this is the shutdown point.

02:22 Below this point, firm will not produce.

02:25 And then become zero profit point.

02:26 At zero profit point, the firm makes neither profit nor losses...

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