AB224 Microeconomics Unit 8 Assignment: Cost and Pricing

This assignment analyzes cost structures and pricing decisions in a perfectly competitive market. The solution begins with a manufacturer's cost data, calculating fixed, variable, average, and marginal costs. It determines the minimum cost output level. The assignment then presents a case study of an egg producer, Brenda, and calculates her break-even and shut-down prices. The solution determines if Brenda makes an economic profit and whether she should continue production at different market prices. The assignment requires application of microeconomic principles to make production and pricing decisions. The solution includes calculations and explanations related to cost curves, break-even points, shut-down points, and profit maximization in a competitive market. The solution provides details on how to compute variable costs, average variable costs, average total costs, and average fixed costs to determine the minimum cost output level. The solution also determines if a business would incur an economic profit at various market prices and if the firm should continue to produce at each of those price levels.

Unit 8 AB224 | Microeconomics
Unit 8 Assignment: Break–even Price and Shut–
down Price
Name:
Course Number and Section:AB224–0X
Date:
General Instructions for all Assignments
1. Unless specified differently by your course instructor, save this assignment template
to your computer with the following file naming format: Course
number_sectionnumber_Last_First_unit number
2. At the top of the template, insert the appropriate information: Your Name, Course
Number and Section, and the Date
3. Insert your answers below, or in the appropriate space provided for in the question.
Your answers should follow APA format with citations to your sources and, at the
bottom of your last page, a list of references. Your answers should also be in Standard
English with correct spelling, punctuation, grammar, and style (double spaced, in Times
New Roman, 12–point, and black font). Respond to questions in a thorough manner,
providing specific examples of concepts, topics, definitions, and other elements asked
for in the questions.
4. Upload the completed Assignment to the appropriate Dropbox.
5. Any questions about the Assignment, or format questions, should be directed to your
course instructor.
In this Assignment, you will be assessed on the following outcomes:
AB224-3: Examine how changes in the cost of production affect pricing and production
quantity decisions of a firm in a perfectly competitive market.
GEL-8.5: Apply critical thinking to the field of study.
Assignment
In this Assignment, you will define and calculate the remaining six major cost elements
of a business, when given the Total Costs and the Quantity Produced, as well as to use
the computed costs to determine a minimum cost output level for that business. In
addition, you will compute both the break-even price and the shut-down price for a
v.6.16.17 1 of 6

Unit 8 AB224 | Microeconomics
hypothetical business in a perfectly competitive market, anddetermine if that business
would incur an economic profit at various market prices, and should the firm continue to
produce at each of those price levels.
Questions
Table 2.a. shows an LED light bulb manufacturer’s total cost of producing LED light
bulbs.
Table 2.a.
Cases of LED
light bulbs
produced in an
hour
Total Cost
0 $4,500
10 $4,900
20 $5,100
30 $5,300
40 $5,400
50 $5,700
60 $6,700
70 $7,900
80 $9,700
90 $11,800
1. What is this manufacturer’s fixed cost? Explain why.
The fixed cost for the manufacturer is $ 4,500 since it is the cost incurred when 0 cases
of LED light bulbs are produced (Mankiw, 2014).
2. Assuming that you only know the Total Costs (TC) (as is shown in the Table 2.a.
above) explain howyou would calculate each of the following:
a. Variable Cost (VC): The variable cost can be derived by deducting the fixed costs
from the total costs for each of the different production level.
v.6.16.17 2 of 6

Unit 8 AB224 | Microeconomics
b. Average Variable Cost (AVC): This would be computed by dividing the total
variable cost for a given number of cases divided by the number of cases.
c. Average Total Cost (ATC): The total cost for different number of cases is
given in the table. To compute ATC, the total cost for a given number of
cases, the total cost would be divided by the number of cases
d. Average Fixed Cost (AFC): The fixed cost is $ 4,500 and does not alter with
the number of cases produced. Hence, ATC at a given production level
would be 4,500 divided by the number of cases.
e. Marginal Costs (of a single case): The difference in the total costs would be
divided by the difference in corresponding case production which would
provide the marginal cost.
3. In Table 3.a., for each level of output, insert into the table the values for:
a. the Variable Cost (VC);
b. the Average Variable Cost (AVC);
c. the Average Total Cost (ATC); and,
d. the Average Fixed Cost (AFC).
Table 3.a.
Cases of LED
light bulbs
produced in an
hour Total Cost
Variable
Costs
Average
Variable
Costs
Average
Total
Costs
Average
Fixed
Cost
a. b. c. d.
0 $4,500 0 n/a n/a n/a
10 $4,900 400 40 490.00 450.00
20 $5,100 600 30 255.00 225.00
30 $5,300 800 26.67 176.67 150.00
40 $5,400 900 22.50 135.00 112.50
50 $5,700 1200 24.00 114.00 90.00
60 $6,700 2200 36.67 111.67 75.00
70 $7,900 3400 48.57 112.86 64.29
80 $9,700 5200 65.00 121.25 56.25
90 $11,800 7300 81.11 131.11 50.00
v.6.16.17 3 of 6

Unit 8 AB224 | Microeconomics
e. Given the information you computed in Table 3.a., what is the minimum cost
output Level? Explain why.
It is evident that the minimum cost output level is 60 cases of LED as it leads to the
minimum ATC of $ 111.67 per case. For all the other output levels, the ATC is higher
(Nicholson & Snyder,2015).
4. Brenda Smith operates her own farm, raising chickens and producing eggs. She
sells her eggs at the local farmers’ market, where there are several other egg
producers’ also selling eggs by the dozen. (Brenda operates in a perfectly
competitive market in which she is a “price taker.”) In order to make sure she does
not lose money on selling eggs, she does an analysis of her costs for producing
eggs as shown on Table 4.a.
Table 4.a.
Dozens
of eggs
Fixed
Cost
Total
Cost
Variable
Costs
Average
Variable
Costs per
dozen
Average
Total
Costs per
dozen
0 $3.35 $3.35 n/a n/a n/a
10 $3.35 $10.50 $7.15 $0.72 $1.05
20 $3.35 $16.40 $13.05 $0.65 $0.82
30 $3.35 $23.10 $19.75 $0.66 $0.77
40 $3.35 $30.00 $26.65 $0.67 $0.75
50 $3.35 $36.50 $33.15 $0.66 $0.73
60 $3.35 $48.00 $44.65 $0.74 $0.80
70 $3.35 $64.40 $61.05 $0.87 $0.92
80 $3.35 $80.00 $76.65 $0.96 $1.00
90 $3.35 $135.00 $131.65 $1.46 $1.50
a. What is Brenda’s break-even price for a dozen of eggs? Explain how you
found that answer.
In a perfectly competitive market, the producers tend to produce at the lowest
point of the average total cost. Considering the table above, it is apparent
that 50 dozens would be produced with a cost of $ 0.73 per dozen. Hence,
Brenda’s break-even price for a dozen of eggs would be $0.73 (Mankiw,
2014).
v.6.16.17 4 of 6

Unit 8 AB224 | Microeconomics
b. What is Brenda’s shut-down price for a dozen of eggs? Explain how you
found that answer.
A business should shut down if it is not able to recover the variable costs as
running the business would lead to incremental losses in this scenario
(Krugman & Wells, 2014). As a result, the shut down price for a dozen of
eggs would be $ 0.65 since it is lower than variable cost of $0.66.per dozen.
c. If the market price of a dozen eggs at the local farmers’ market is $1.45 per
dozen, will Brenda make an economic profit? Explainhow you determined
your answer.
In a perfectly competitive market, the producer is price taker. Since the cost
of production is $ 0.73 per dozen which is lower than the market price of $
1.45 per dozen, hence economic profit would be made by Brenda (Pindyck,.
& Rubinfeld, 2014).
d. If the market price of a dozen eggs at the local farmers’ market is $1.45 per
dozen, should Brenda continue producing eggs in the short run? Explain
how you determined your answer.
Since the current market price of $1,45 per dozen exceeds the shut down
price of $ 0.65 per dozen, hence in the short run Brenda should continue egg
production. Also, she is making economic profits which further would support
continuation of production in the short run.
e. If the market price of a dozen eggs at the local farmers’ market is 72 cents
per dozen, will Brenda make an economic profit? Explain how you
determined your answer.
It is evident that the break even for Brenda is achieved when the price is 73
cents per dozen. Since the current market price is lower than the break-even
price, hence economic profit would not be made by Brenda.
f. If the market price of a dozen eggs at the local farmers’ market is 72 cents
per dozen, should Brenda continue producing eggs in the short run?
Explain how you determined your answer.
v.6.16.17 5 of 6

Unit 8 AB224 | Microeconomics
Since the current market price of $0.72 per dozen exceeds the shut down
price of $ 0.65 per dozen, hence in the short run Brenda should continue egg
production. Besides, recovering the variable costs completely, Brenda is able
to partially recover the fixed cost and hence –production should continue by
Brenda.
g. If the market price of a dozen eggs at the local farmers’ market is 64 cents
per dozen, will Brenda make an economic profit? Explain how you
determined your answer.
It is evident that the break even for Brenda is achieved when the price is 73
cents per dozen. Since the current market price is lower than the break-even
price, hence economic profit would not be made by Brenda.
h. If the market price of a dozen eggs at the local farmers’ market is 64 cents
per dozen, should Brenda continue producing eggs in the short run?
Explain how you determined your answer.
Since the current market price of $0.64 per dozen is lower than the shut
down price of $ 0.65 per dozen, hence in the short run Brenda should
discontinue egg production (Mankiw, 2014). At the existing price, Brenda is
not able to fully recover the variable costs and hence must stop egg
production.
--------------------------------------------
References:
Krugman, P. & Wells, R. (2014).Microeconomics (2nded.). London: Worth Publishers.
Mankiw, G. (2014) Microeconomics (6thed.). London: Worth Publishers.
Nicholson, W. & Snyder, C. (2015).Fundamentals of Microeconomics (11thed.). New
York: Cengage Learning.
Pindyck, R. & Rubinfeld, D. (2014).Microeconomics (5th ed.). London: Prentice-Hall
Publications.
v.6.16.17 6 of 6

Unit 8 AB224 | Microeconomics
Unit 8 Assignment: Break–even Price and Shut–down Price Grading Rubric:
v.6.16.17 7 of 6

Unit 8 AB224 | Microeconomics
Content
Percent
Possible
Points
Possible
Full Assignment 100% 80
Overall Writing: 20% 16
Correct coversheet information at the top of 1st page 5% 4.00
APA format for answers 3% 2.40
Correct citations 3% 2.40
Standard English no errors 4% 3.20
At least one, or more, references 5% 4.00
Answers: provides complete information
demonstrating analysis and critical thinking: 80% 64
Individual Questions:
1. Calculate this manufacturer’s fixed cost 5% 4.00
2. a.–d. Define how this manufacturer’s variable cost,
average variable cost, average total cost, average
fixed cost, and marginal cost are calculated. 9% 7.20
3. a.–d. Compute this manufacturer's variable cost,
average variable cost, average total cost, and
average fixed cost 9% 7.20
3.e. Determine this manufacturer's minimum cost
output level and explain. 6% 4.80
4. a. –Brenda's break-even price? 8% 6.40
4. b. – Brenda's shut-down price? 8% 6.40
4. c. – Any economic profit at $1.45 per dozen? 5% 4.00
4. d. – Continue producing at $1.45 per dozen? 6% 4.80
4. e. – Any economic profit at $0.72 per dozen? 6% 4.80
4. f. – Continue producing at $0.72 per dozen? 6% 4.80
4. g. – Any economic profit at $0.64 per dozen? 6% 4.80
4. h. – Continue producing at $0.64 per dozen? 6% 4.80
Sub-total for Individual Questions: 80% 64
v.6.16.17 8 of 6