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hi,,
i really need help with this assignment, its taking me forever and i still cant get it right. Can anyone help plzzzzz
You are in a business of producing pocket calculators. Your total costs are:
QS
TC
0
30
1
40
2
48
3
55
4
70
5
95
6
150
a-calculate TFC, TVC, ATC, AFC, AVC, and MC for each of these quantities, Show your answers in a table.
b- Show the TC, TFC, TVC curves in one graph.
c- Show the ATC, AFC, AVC and MC in a second graph.
Assume that the market for pocket calculators is competitive and that the market equilibrium price is $15.
d- what quantity will you produce? Is there a profit or a loss? By how much? Explain.
e- in a separate graph, show your firm’s short-run supply curve.
Is there something I'm missing here?
The question is, since you somehow always lose 30$ even if you don't produce anything, and the cost per unit never drops below 17.50$, how can you minimize loss.
What quantity you would produce? Either 3 or 4, since at those quantities, you lose 10$
Is there a profit or loss? loss, 10$
The problem is stupid, since knowing those things in advance, as the problem is stated, one would never commit the 30$ loss to begin with, and loss would be 0, along with TC at QS(0)
Seems like you would shut down the plant and sell it, assuming that your calculations are correct.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
sergebeauchamp: The problem is stupid, since knowing those things in advance, as the problem is stated, one would never commit the 30$ loss to begin with, and loss would be 0, along with TC at QS(0)
In regards to this, ask you professor how you could possibly know these inputs before the fact. I have never gotten a straight answer to this question from my professors.
Well, I don't want to give the impression that this forum provides an easy way to avoid doing your homework. However, everyone seems to be struggling with this and that needs to be corrected.
There are two keys to answering the question:
First, you need to realize that fixed costs are defined as those costs that are not dependent on production. A common example would be rent. If you're producing pocket calculators, the rent for your office space and factory will always be $X whether you sell any pocket calculators or not.
Thus, when we see that costs are $30 when no output is produced, we know that $30 is the total fixed cost. So, to get total variable cost (those costs that do vary with production), we just subtract the total fixed cost from the total cost. For example, variable costs at QS =1 are $10 ($40-$30).
The second key to answering the question is understanding what marginal costs are. Marginal Costs are the cost of producing each additional unit. Do you see how this would be calculated? Here's an example. The marginal cost of producing the first unit is $10. (TC(1)-TC(0)/QS(1)-QS(0)) or ($40-$30)/(1-0) = $10.
Knowing these keys will allow you to complete the table. Once you have the table you can draw the curves. Being the nice person I am, I already did the work for you. :) You can download the Excel File with the completed table and curves here:
http://mises.org/Community/cfs-file.ashx/__key/CommunityServer.Components.UserFiles/00.00.00.22.36/Answer_5F00_to_5F00_Cost_5F00_Question.zip
Now that you have the table and curves, the last questions are simple. If the price of calculators is $15, a profit maximizing firm in a perfectly competitive market will produce until marginal costs equal price. Marginal costs are $15 at 4. So the firm will produce 4 units.
What's the short-run supply curve? It's just the Marginal Cost Curve! Which you already drew in c, and just have to redraw in e (I also did it for you in the spreadsheet).And that's all there is to it. ;)
Ambition is a dream with a V8 engine - Elvis Presley
sergebeauchamp: Is there something I'm missing here? The question is, since you somehow always lose 30$ even if you don't produce anything, and the cost per unit never drops below 17.50$, how can you minimize loss. What quantity you would produce? Either 3 or 4, since at those quantities, you lose 10tiny_mce_markernbsp; Is there a profit or loss? loss, 10$ The problem is stupid, since knowing those things in advance, as the problem is stated, one would never commit the 30$ loss to begin with, and loss would be 0, along with TC at QS(0)
What quantity you would produce? Either 3 or 4, since at those quantities, you lose 10tiny_mce_markernbsp;
You are right that firm in this example is not profitable, but I don't think it is stupid. Understanding how to deal with losses is just as important as understanding how to deal with profits (in the current economy maybe more so).
One could easily read a very telling narrative into the question. For example, suppose the price of calculators last year was $30 per unit, this means the firm would have been profitable. However, this year the price may have fallen in half for one reason or another leaving the firm making a loss. A very important question to ask is whether the firm should shut down. The answer is No. As you demonstrated, the firm would actually lose more money shutting down than if it produced the profit maximizing amount. So the firm should go right on ahead and keep producing calculators like normal.
In fact, the firm should only shut down if marginal revenue (price) is below average variable costs at the profit maximing level of production. In this example, the firm should ONLY shut down if price falls below $10.
http://en.wikipedia.org/wiki/Shutdown_%28economics%29
None of these lessons are stupid. And I would imagine that will be point the professor is making in this exercise.
Student: Now that you have the table and curves, the last questions are simple. If the price of calculators is $15, a profit maximizing firm in a perfectly competitive market will produce until marginal costs equal price. Marginal costs are $15 at 4. So the firm will produce 4 units.
That's interesting. The approach I did was simply to calculate profit (loss) and pick up production that maximize it, without consideration for marginal cost.
This is because I assume that those data are available to the firm, so in that case, why would the first care about marginal cost? They want only maximum profit (minimum loss).
Taking your statement that a profit maximizing firm produce until marginal cost equal price, take the following data (slightly changed from the initial example):
If a firm stops at marginal cost = price, they will stop at producing 2 units. But knowing the data in advance (or forecasting it), they won't, it it will not minimize loss. Instead, they will produce 4 units to minimize loss at 10$.
I think how the problem is stated assumes that the firm is like a robot that mindlessly respond deterministically to inputs given.
While in fact, what the entrepreneurs does is try to forecast the future state of the market, and maximize his profits based on how many units produced at a given cost will generate how much revenue.
Then profit (or loss) originates from his successful forecasting in competing with other entrepreneurs.
In a way, I think this problem leads the student in a subtle way to think of the economy in the way a central planner does - by thinking that firms are acting stupidly like robots, and that he has some special knowledge that allows him to direct the firm production better than they would.
So in a way, someone being trained with that kind of exercise would be conditioned in fundamentally misunderstanding the market process in favor of central planning.
Instead, a realist question would be: What information does the firm entrepreneur has? Because the profit or loss will be based on that, his information, and his forecasting.
The core of the problem, is that decision that the entrepreneur takes happens before committing to the 30$ fixed cost, and the forecasting of future profit happens then. Not after somehow his cost are sunk, and then he has to figure just what to do to have a loss. So in reality, if the entrepreneur would know those data in advance, his loss would be 0, because he won't commit to the project.
Or if he still commit to the project, that would mean that he expect either the years before or the years after to have a profit that would compensate for that 10$ loss, in such case the 10$ would not really be a loss for the duration of the project, simply an accounting loss for that year.
What do you think?
Student: A very important question to ask is whether the firm should shut down. The answer is No. As you demonstrated, the firm would actually lose more money shutting down than if it produced the profit maximizing amount. So the firm should go right on ahead and keep producing calculators like normal. In fact, the firm should only shut down if marginal revenue (price) is below average variable costs at the profit maximing level of production. In this example, the firm should ONLY shut down if price falls below $10.
A very important question to ask is whether the firm should shut down. The answer is No. As you demonstrated, the firm would actually lose more money shutting down than if it produced the profit maximizing amount. So the firm should go right on ahead and keep producing calculators like normal.
Regarding shutting down, any firm would ask "What about the years after?" Does the market data stays the same? Do the fixed cost and variable cost stay the same as well? Therefore, it's better to shut it down right now and get the 30$ loss than keep it running for years at a 10$ loss, and reallocate the capital to a profitable venture.
If the entrepreneur expects the market conditions to be better next year, then the 10$ loss is not an economic loss (i.e. emerged out of entrepreneurial error), but capital investment, since it is an deliberate expenditure in order to generate a profit in the future.
See, my point is that any entrepreneur makes decision on his forecast of market conditions in the future.
This exercise implies that the firm's decision are robotic based on a simple series of input in the present.
In a way, the exercise's 'perfectly competitive firm' is not a firm, it's a mindless robot, designed to make use of arithmetic to arrive at pseudo conclusion that are totally irrelevant and opposite to any real firm operating in the market.
It hides and misguide more the student then reveal any truth about the market process.
What's the use in that?