VC, is his wage cost ($80 per worker per day) and his other input costs ($0.50 per cup). Marty’s total cost, TC, is the sum of the variable cost and his fixed cost of $100 per day. The calculations are accompanied in table 1 below:
Table 1 Calculations of VC, TC, MC, AVC, AFC, and ATC
Quantity of labor (workers)
Quantity of frozen yogurt (cups)
VC
TC
MC of cup
AFC of cup
AVC of cup
ATC of cup
0
0
$0
$100
-
-
-
1
110
1×80+110×0.5=$135
$235
(235-100)/110=$1.23
$0.91
$1.23
$2.14
2
200
2×80+200×0.5=$260
$360
(360-235)/90=$1.39
$0.50
$1.30
$1.80
3
270
3×80+270×0.5=$375
$475
(475-360)/70=$1.64
$0.37
$1.39
$1.75
4
300
4×80+300×0.5=$470
$570
(570-475)/30=$3.17
$0.33
$1.57
$1.90
5
320
5×80+320×0.5=$560
$660
(660-570)/20=$4.50
$0.31
$1.75
$2.05
6
330
6×80+330×0.5=$645
$745
(745-660)/10=$8.50
$0.30
$1.95
$2.25
b. Diagram of AFC, AVC, and ATC curves
c. The principle that explains the decline in AFC is with increase of the output is known as the spreading effect and implies that the fixed cost is more and more spread over units of the output with output’s increase. On the other hand, as output increases the AVC increases because of the effect of diminishing returns. The diminishing returns stipulate that the cost of producing each additional unit of the output will be more.
d. On minimization of the average total cost, Marginal cost, MC, per cup of frozen yogurt is shown in the table 1. This is the change in total cost divided by the change in quantity of output.
Question 2
a. There will be a rise in the short-run profits of sushi restaurant, which will induce others to open such types of restaurants. As a result, the number of these restaurants will increase in the town. Nevertheless, after sometime because of the increase in their supply, the price equilibrium of such restaurants will decrease and making their short-run profits of the initial sushi restaurant to be low.
b. In this town, the number of steakhouses in the long run will decrease since the owners incur losses, which will make them to exit the industry.
Question 3
a. With Zetia being patented by Merck, the government regulations creates a barrier for others to enter giving Merck the market power
b. The provision of piped water ensures that there are increasing returns to scale. Therefore, given that building water pipes network incurs large fixed costs to each individual household with the more water being delivered significantly reducing the average total cost, WaterWorks becomes a cost advantage company. This consequently gives it the market power.
c. With Chiquita controlling most plantations of banana plantations, yet they are scarce, it is able to have a market power.
d. Walt Disney Company owns the copyright of animations that feature Mickey Mouse. As a result, the government has regulations that bars others from entering, giving it market power.
Question 4
a. The calculations of Total Revenue (TR) and Marginal Revenues (MR are as follows: Given that marginal revenue is the additional revenue per unit of output, that is, ΔTR/ΔQ. The calculations are as in table 2:
Table 2 TR and MR calculation
Price of download
Quantity of downloads demand
TR
MR
$30
0
30×0=$0
-
8
1
8×1=$8
(8-0)/(1-0)=$8
6
3
6×3=$18
(18-8)/(3-1)=$5
4
6
4×6=$24
(24-18)/(6-3)=$2
2
10
2×1=$20
(20-24)/(10-6)=$-1
0
15
0×15=$0
(0-20)/(15-10)=$-4
b. Given that Bob is proud and wants many people to download the film, he would charge $0, which has 15 downloads being the largest quantity that the group can sell.
c. Bill wants more total revenues as possible hence would charge $4. At the price of $4, the total revenue is $24, which is the greatest though there will only be 6 downloads.
d. Ben on the other hand wants to maximize profits as possible. Therefore he would charge $6, with three downloads. Even so, if the downloads exceeds the number, they will lose Baxter’s money because the marginal revenue would be less than the marginal cost.
e. With Brad wanting to charge the efficient price, his price would be $4 since at that charge the price would be the same as the marginal cost, which is efficient and has 6 downloads.
