A computer company produces affordable, easy-touse home...

A computer company produces affordable, easy-touse 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 AC, MC, and 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 $\mathrm{AC}, \mathrm{MC}$ , and AVC curves to illustrate your answer and show the profit or loss.

A computer company produces affordable, easy-touse 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 AC, MC, and 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 $\mathrm{AC}, \mathrm{MC}$ , and AVC curves to illustrate your answer and show the profit or loss.

Key Concepts

Shutdown Point

The shutdown point is the price level at which the price of the product equals the average variable cost, indicating that the firm is barely covering its variable costs. Below this point, the firm would minimize its losses by ceasing production in the short run.

Break-Even Point (Zero-Profit Point)

The break-even point is the production level at which total revenues equal total costs, resulting in zero profit. It is a critical concept in business as it determines the minimum performance required to avoid losses.

Average Variable Cost

Average variable cost is found by dividing the total variable cost by the number of units produced. It provides insight into the variable production costs on a per-unit basis and is used to help determine the shutdown point in the short run.

Average Cost

Average cost is calculated by dividing total costs by the quantity of units produced. It gives an idea of the cost per unit and is important for pricing strategies and for identifying economies of scale in production.

Fixed Costs

These are costs that do not vary with the level of output, meaning they must be paid regardless of production volume. They form the baseline cost structure of a company and are essential in calculating total costs when combined with variable costs.

Total Costs

Total costs are the sum of fixed costs and variable costs incurred in production. This concept is fundamental in determining profitability and for calculating average cost per unit, influencing decisions on scaling production levels.

Variable Costs

Variable costs change with the level of output. They depend directly on how many units are produced and typically include expenses such as raw materials and labor. Understanding variable costs is crucial for assessing how production changes affect overall cost behavior.

Cost Curve Graphing

Graphing cost curves—specifically the average cost, marginal cost, and average variable cost curves—provides a visual representation of how costs behave as output changes. These graphs help in analyzing production efficiency, identifying break-even and shutdown points, and making informed pricing decisions.

Marginal Cost

Marginal cost refers to the additional cost of producing one more unit of output. This concept is critical for making production decisions because it helps determine the point at which producing one more unit will add to or reduce overall profit.

Transcript

00:01 Today we'll be solving question number 41 from chapter 8 of principles of microeconomics.

00:05 This question asks us to solve for some values of a computer store selling computers for a certain fixed cost and a certain given marginal cost.

00:14 With these values, it wants us to find the variable cost, total cost, average cost, and average variable cost.

00:20 So from the fixed cost and marginal cost, we know that the variable cost is the cost of production that increases with each quantity produced.

00:28 So at the 0 -with unit, we don't have a variable cost.

00:31 At the first unit, our variable cost is equal to our marginal cost.

00:37 At our second unit, our variable cost is equal to the sum of our first and second marginal cost.

00:44 And we just continue on to solve for the variable cost using this method.

01:05 Now to find the total cost, we know that the total cost is the sum of the variable cost and the fixed cost.

01:10 So we can just do the sum of the fixed cost and the variable cost.

01:15 Now for the zero -width unit, we just have the fixed cost, which is $250.

01:20 But if we drag this formula down, we can get the total cost for all seven units.

01:25 Now to get the average cost, we know that the average cost is the total cost divided by the quantity.

01:31 So we get the total cost divided by the quantity.

01:35 Of course, for our first or our 0th unit, we can't do this.

01:38 So we start on the first unit, doing the first cost, the cost of the first unit, total cost divided by the quantity.

01:46 Quantity, which is 1, and that's 950, and we can do the same thing we did in the last column and just drag this value down.

01:52 Now to find the average variable cost.

01:54 We know that the formula for the average variable cost is the variable cost divided by the quantity.

01:59 So here we have the variable cost divided by our quantity.

02:04 And for the same column, we can just drag this formula down, and there we go.

02:09 Now we have our values for variable cost, total cost, average cost, and average variable cost.

02:14 Part two of this question wants us to find the zero profit point and the shutdown point for this company.

02:21 Now, we know that the zero profit point is going to be where the marginal cost equals the average cost.

02:26 And so we can see that the marginal cost is average average cost when the price is $450...

Please give Ace some feedback