Franks Weiner FActory has the following costs: Weiner Machine: $1000 Hog parts:

Question

Franks Weiner FActory has the following costs:

Weiner Machine: $1000

Hog parts: $50/1000lb

Chicken Parts: $75/1000 lb

Beef Parts: $100/1000 lb

"other" parts: $10/1000 lb.

Each weiner is made with equal parts Hog/Chicken/beef/other.

What is Frank's short run shutdown price?

Multiple choice

a) $1.24

b) $.235

c) $1.00

d) $.50

Part B

If the price of hot dogs is $2.00, what can Frank expect?

Multiple choice

a) Higher input costs

b) Lower input costs

c) an increase in competition

d) a decrease in competition

a) $1.24

b) $.235

c) $1.00

d) $.50

Part B

If the price of hot dogs is $2.00, what can Frank expect?

Multiple choice

a) Higher input costs

b) Lower input costs

c) an increase in competition

d) a decrease in competition

Explanation / Answer

PART A: Option (b)

Shut-down price is the average variable cost.

Hog, Chicken, Beef & Other parts are the variable costs.

Total variable cost for 1,000 lb = $(50 + 75 + 100 + 10) = $235

Average variable cost = Shut-down Price = $235 / 1,000 = $0.235

PART B: Option (c)

Average total cost = (Fixed costs + Total variable cost) / Output

= $(1,000 + 235) / 1,000 = $1,235 / 1,000 = $1.235

If market price is above ATC ($2 > $1.235), there is an economic profit which will lead to new entry in market and increase in competition.

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