A company producing plastic cell-phone cases uses a $200 blower, a $4,500 proces
ID: 1200667 • Letter: A
Question
A company producing plastic cell-phone cases uses a $200 blower, a $4,500 processor, and $500 worth of molds. The rent paid for their space in an industrial park is $2,000 per production period. The cost of materials (resins and compounds) is $4.00 per unit. The cell phone case market is competitive, with a market price of $20. Each unit of labor is paid $6,000 per production period. The production technology is described by Table 3. 2(a). At what level of output does the ATC and AVC reach their minimum level? Does the MC curve pass through them at these quantities? 2(b). How many cell-phone cases will the company produce to maximize profit? What is the maximum level of profit?Explanation / Answer
Consider the fact that fixed cost for this business is $7200 that includes cost of materials and rents. The variable cost include the labor wages and per unit cost. The table summerizes this relationship:
LABOR
OUTPUT
VC
TC
MC
ATC
AVC
TR
PROFIT
0
0.00
7200
0
7200
0
-7200
1
546.00
7200
8184.0
15384.0
15.0
28.2
15.0
10920.0
-4464.0
2
1251.02
7200
17004.1
24204.1
12.5
19.3
13.6
25020.4
816.3
3
2021.61
7200
26086.4
33286.4
11.8
16.5
12.9
40432.2
7145.8
4
2810.07
7200
35240.3
42440.3
11.6
15.1
12.5
56201.4
13761.1
5
3578.97
7200
44315.9
51515.9
11.8
14.4
12.4
71579.4
20063.5
6
4295.38
7200
53181.5
60381.5
12.4
14.1
12.4
85907.6
25526.1
7
4928.80
7200
61715.2
68915.2
13.5
14.0
12.5
98576.0
29660.8
8
5450.24
7200
69801.0
77001.0
15.5
14.1
12.8
109004.8
32003.8
9
5831.72
7200
77326.9
84526.9
19.7
14.5
13.3
116634.4
32107.5
10
6045.96
7200
84183.8
91383.8
32.0
15.1
13.9
120919.2
29535.4
a)
Marginal cost cuts the Average total cost at its minimum of $12.4. MC also cuts the ATC at its minimum of 14.0
b) The profit maximizing quantity of labor is 9, profit maximizing quantity is 5381.72 units. The amount of profits earned is $32107.5
LABOR
OUTPUT
FCVC
TC
MC
ATC
AVC
TR
PROFIT
0
0.00
7200
0
7200
0
-7200
1
546.00
7200
8184.0
15384.0
15.0
28.2
15.0
10920.0
-4464.0
2
1251.02
7200
17004.1
24204.1
12.5
19.3
13.6
25020.4
816.3
3
2021.61
7200
26086.4
33286.4
11.8
16.5
12.9
40432.2
7145.8
4
2810.07
7200
35240.3
42440.3
11.6
15.1
12.5
56201.4
13761.1
5
3578.97
7200
44315.9
51515.9
11.8
14.4
12.4
71579.4
20063.5
6
4295.38
7200
53181.5
60381.5
12.4
14.1
12.4
85907.6
25526.1
7
4928.80
7200
61715.2
68915.2
13.5
14.0
12.5
98576.0
29660.8
8
5450.24
7200
69801.0
77001.0
15.5
14.1
12.8
109004.8
32003.8
9
5831.72
7200
77326.9
84526.9
19.7
14.5
13.3
116634.4
32107.5
10
6045.96
7200
84183.8
91383.8
32.0
15.1
13.9
120919.2
29535.4
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