Compute the Cost. Edward the entrepreneur takes two hours to cut a lawn, and he

Question

Compute the Cost. Edward the entrepreneur takes two hours to cut a lawn, and he cuts 100 lawns per year. He uses solar-powered equipment (truck and mower) that will last forever—and can be sold at any time for $20,000. Edward could earn $20 per hour as a pedicurist. The interest rate is 10 percent.

a. Given his current output level, compute his marginal cost $ 40 and average cost is $ 60

b. Suppose he decides to reduce the number of lawns cut by half, to 50 per year. His new marginal cost is $?? and his new marginal cost is $ ??.

Explanation / Answer

(a)

Marginal cost = $20 x 2 = $40

Average cost = $20 x 2 + [($20,000 x 10%) / 100] = $40 + $20 = $60

(b)

Marginal cost will not change, it's the same at $40.

New average cost = $20 x 2 + [($20,000 x 10%) / 50] = $40 + $40 = $80

Note: Average cost includes the interest-adjusted cost of using the solar equipment.

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