Microeconomics - Cost Elements of a Business

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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 also clearly explain how the Average Total Cost of a new output level is affected by its share of Fixed Costs and Variable Costs.

Unit 7 BU224 | Microeconomics Unit 7 Assignment: Cost Elements of a Business Name: Course Number and Section: BU224–0X 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_section number_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. 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 also clearly explain how the Average Total Cost of a new output level is affected by its share of Fixed Costs and Variable Costs. Questions 1. When Total Costs (TC) are known, explain how to calculate each of the following: v.6.16.17 1 of 4 BU224 | Microeconomics Unit 7 a. Fixed Costs (FC) b. Variable Costs (VC) c. Average Variable Costs (AVC) d. Average Total Costs (ATC) e. Average Fixed Costs (AFC) f. Marginal Costs (MC) 2. Table 1. shows the hourly production and Total Cost estimates for a new manufacturing firm wishing to enter the smart phone market. Fill in the blank cells in columns a., b., c., d., and e. on the table by computing the appropriate values. Table 1. Smart cell phones produce d in an hour Total Cost (TC) Variable Costs (VC) a. 0 15 30 45 $3,200 $3,525 $3,875 $4,250 60 $4,650 v.6.16.17 Average Variable Costs (AVC) Average Total Costs (ATC) Average Fixed Cost (AFC) Marginal Cost (MC) b. n/a c. n/a d. n/a e. n/a 2 of 4 Unit 7 75 $5,075 90 $5,525 105 120 135 $6,725 $8,210 $9,950 BU224 | Microeconomics 3. Based on your calculations in completing the table in Question 2, what is this manufacturer’s minimum cost output level? Explain your answer. 4. According to our textbook (page 341) when one additional unit is produced, two factors directly impact the change in average total costs, the Spreading effect and the Diminishing Returns effect. In the following two situations explain how the factors of the Spreading effect and the Diminishing Returns effect cause the average total cost to be different. a. Production of the 10th Gizmo resulted in an average total cost (ATC) of $20, but production of the 11th Gizmo resulted in an average total cost of $22. b. Production of the 10th Gizmo resulted in an average total cost (ATC) of $20, but production of the 11th Gizmo resulted in an average total cost of $18. -------------------------------------------v.6.16.17 3 of 4 Unit 7 BU224 | Microeconomics References: v.6.16.17 4 of 4 Unit 7 BU224 | Microeconomics Unit 7 Assignment: Cost Elements of a Business Grading Rubric Content Full Assignment Overall Writing: Correct coversheet information at the top of 1st page APA format for answers Correct citations Standard English, no errors At least one, or more, references Answers: provides complete information demonstrating analysis and critical thinking: Individual Questions: 1. a. - Explain the calculation of variable cost. 1. b. - Explain the calculation of average variable cost. 1. c. - Explain the calculation of average total cost. 1. d. - Explain the calculation of average fixed cost 1. e. - Explain the calculation of marginal cost 2. a. - Calculate this manufacturer’s variable cost. 2. b. - Calculate this manufacturer’s average variable cost. 2. c. - Calculate this manufacturer’s average total cost. 2. d. - Calculate this manufacturer’s average fixed cost 2. e. - Calculate this manufacturer’s marginal cost 3. - Identify this manufacturer’s minimum cost output level. 4. a. - Explain why the average total cost of 11th Gizmo is $22. 4. b. - Explain why the average total cost of 11th Gizmo is $18. v.6.16.17 Percent Possible 100% Points Possible 40 20% 8 5% 3% 3% 4% 5% 80% 2.00 1.20 1.20 1.60 2.00 32 6% 6% 6% 6% 6% 6% 2.40 2.40 2.40 2.40 2.40 2.40 6% 6% 6% 6% 2.40 2.40 2.40 2.40 6% 2.40 7% 2.80 7% 2.80 5 of 4
Hints for Unit 7 Assignment Some definitions to remember: a. Fixed costs are the Total costs incurred even if NO items are manufactured. b. Variable cost for that unit is the total cost for that unit minus the total cost of producing ZERO units. c. Average variable cost for that unit is the variable cost for that number of units divided by the number of units. d. Average total cost is the total costs for that number of units divided by the number of units. e. Average fixed cost is the fixed cost when NO units are produced divided by the number of units produced. f. The minimum-cost output is the number of units produced when the average total cost is the LOWEST. g. Marginal cost is the total cost for a particular number or units minus the total cost for one LESS of the same number of units. -------------------------------------------------The textbook states that “increasing output has two opposing effects on average total cost” (Krugman, 2013, p. 329). The spreading effect (the effect of spreading the fixed costs over additional units) is one effect. The other effect is that of the diminishing returns effect (the effect of increasing variable costs as the number of units increases). As more units are produced each additional unit’s share the FIXED costs gets smaller and smaller, because we are spreading that FIXED cost over so many units (spreading effect). As production is increased, there comes a level of production in which that share of the fixed costs is so small that it is drastically outweighed by the change in average VARIABLE costs, which, because of diminishing returns to labor (like our farming example of adding more and more workers, but only increasing output by a little bit), causes the VARABLE costs to increase significantly. As long as the share of FIXED costs is much smaller than the share of VARIABLE costs, we would see average total costs DECREASING. At the level of production in which the next unit’s share of fixed costs is much smaller than its share of VARIABLE costs, we will see its average total costs begin to INCREASE. v.6.8.17

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EagleEye1
School: UIUC

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Running head: BU224 MICROECONOMICS
1

Cost Elements of a Business
Student’s Name:
Instructor’s Name:
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BU224 MICROECONOMICS

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Questions

1. When Total Costs (TC) are known, explain how to calculate each of the following:
a. Fixed Costs (FC): FC = Total costs – Variable costs
Fixed costs are the Total costs incurred even if no items are manufactured.
b. Variable Costs (VC): VC = Total costs – Fixed costs
Variable costs are the total cost for that unit minus the total cost of producing ZERO unit. Also
are the costs incurred in producing an actual product and vary according to the level of output.
c. Average Variable Costs (AVC): AVC = Variables costs/Quantity
Average variable costs are the costs incurred in producing one unit of a product. Average
variable cost for that unit is the variable cost for that number of units divided by the number of
units.
d. Average Total Costs (ATC): ATC = To...

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Thanks, good work

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