Ball Bearings, Inc., faces costs of production as follows: Total Fixed Costs Tot

Question

Ball Bearings, Inc., faces costs of production as follows: Total Fixed Costs Total Variable Costs Dollars 180 180 180 180 180 180 180 uant Dollars) 80 140 180 240 320 450 2 Complete the following table by calculating the company's total cost, marginal cost, average fixed cost, average variable cost, and average total cost at each level of production Marginal Average Fixed Cost Average Variable Average Total Cost Total Cost Cost Cost Quantity (Dollars) (Dollars) (Dollars) (Dollars) Dollars) 4 6 The price of a case of ball bearings is $80. Seeing that he can't make a profit, the company's chief executive officer (CEO) decides to shut down operations The firm's profit in this case is $ number in the previous cell.) . (Note: If the firm suffers a loss, enter a negative True or False: This was a wise decision True False Vaguely remembering his introductory economics course, the company's chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity At this level of production, the firm's profit is $ a negative number in the previous cell.) . (Note: If the firm suffers a loss, enter True or False: This is the best decision the firm can make True False

Explanation / Answer

(1)

Working notes:

(a) Total cost (TC) = TFC + TVC

(b) Marginal cost (MC) = Change in TC / Change in Q

(c) Average fixed cost (AFC) = TFC / Q

(d) Average variable cost (AVC) = TVC / Q

(c) Average total cost (ATC) = TC / Q

Filled in table as follows.

(2) When Price is $80 and the firm shuts down,

Profit = - $180 (When firm shuts down, profit is negative indicating a loss, which is equal to Fixed cost).

(3) FALSE

Shutting down was not a wise decision because price is higher than the minimum point of AVC, therefore firm could cover its variable costs by revenue in short run.

(4) When Q = 1, Price = $80 and ATC = $260,

Profit = Q x (P - ATC) = 1 x $(80 - 260) = 1 x (- $180) = - $180

(5) FALSE

Deision to produce only 1 units is wrong beause loss is minimized (= $100) at output levels of 4 and 5 units.

Q TFC ($) TVC ($) TC ($) MC ($) AFC ($) AVC ($) ATC ($) 0 180 0 180 80 1 180 80 260 180 80 260 60 2 180 140 320 90 70 160 40 3 180 180 360 60 60 120 60 4 180 240 420 45 60 105 80 5 180 320 500 36 64 100 130 6 180 450 630 30 75 105

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