Acc 561 Week 1 Business Economics Assignment
Business economics assignment
Part A
1. Many firms have similar cost structures, it might be possible to predict the prices of other competing organizations. Also cost plus pricing is simple to compute.
Markup= (price-cost)/ cost price= cost (1+markup)
P= Lab+ Mat+ Mkt+ F/Q+Z*A/Q
Q: planned output A: gross operating assets Z: desired profit rate
MR=P/ (1+1/Z) if firm is maximizing profit: MC=MR=P/ (1+1/Z)
P= MC* [1/ (1+ 1/Z)]
So profit maximizing price is a mark up on marginal cost depending on demand elasticity. If AC closes to MC, then close to max.
2. The potential problem of cost plus pricing is that the supplying division may have the opportunity to pass on operating inefficiencies to the purchasing division in
the form of higher prices where no predetermined cost is agreed between divisions, this problem can arise in the short-term as well as the longer term. As the amount of profit for the supplying division is determined by the amount of cost incurred, this can lead to a situation where the division can actually increased its profit through greater inefficiency. The purchasing division must bear the burden of any increased costs in the supplying division and, unless these costs can be passed on to customers in the form of higher prices, profit of purchasing division will be reduced.
3. The price increasing means cost increases. In this contract supplying division is free to choose the quantity of labor, but wage and benefits are specified. Bhagat agreed to a 30 percent raise for workers, it against the contract. So Gina can negotiate the minimum volume of purchasing with Bhagat.
Part B
1. a. Current Average Product =Total product/quantity of input= (25×25×40)/25=1,000 Assume 1 unit increase in machines: Q=25×25× (40+1) =25625,
So Current Marginal product =25×25×41-25×25×40=625
b. With increasing returns to scale, a 1 percent change in all inputs results in a greater than 1 percent change in output. Assuming 100 workers and 100 machines produce 250000 guns. While 101 workers and 101 machines produce 255025, a 2 percent increase in output. c. Total cost: 25×3000+40×6000= 99000 Average cost: total cost/ quantity= 99000/ 25000= 3.96 Assuming the number of machine does not change, produce one additional cost: Marginal cost: change in total cost/change in output= 3 d. Many production functions display increasing marginal and average products over some ranges. However, most production functions reach a point after which the marginal product of an input declines. This observation often is called the law of diminishing returns. I think this production does not display this characteristic because this production functions can not decrease.
2. Four basic conditions:
A large number of potential buyers and sellers
Product homogeneity
Rapid dissemination of accurate information at low cost
Free entry into and exit from the market
3. The firm should operate in the short term, as long as it obtains enough profit to cover its total costs. Revenue in excess of variable costs helps to cover fixed costs which are incurred even if the firm does not operate.
4. No. The excess returns are likely to go to the manager. The manager's salary will be bid up by other firms who want the manager's services.
5. The optimal output of 76.92 is found by setting MR = MC: 1000 - 10Q = 3Q. The corresponding price of $615.40 is found from the demand curve. The profits are TR - TC = $47,336.57 - $8,875.03 = $38,461.54. (we are assuming that there are no fixed costs. Thus, total cost is the area under the marginal cost curve.)
Part A
1. Many firms have similar cost structures, it might be possible to predict the prices of other competing organizations. Also cost plus pricing is simple to compute.
Markup= (price-cost)/ cost price= cost (1+markup)
P= Lab+ Mat+ Mkt+ F/Q+Z*A/Q
Q: planned output A: gross operating assets Z: desired profit rate
MR=P/ (1+1/Z) if firm is maximizing profit: MC=MR=P/ (1+1/Z)
P= MC* [1/ (1+ 1/Z)]
So profit maximizing price is a mark up on marginal cost depending on demand elasticity. If AC closes to MC, then close to max.
2. The potential problem of cost plus pricing is that the supplying division may have the opportunity to pass on operating inefficiencies to the purchasing division in
the form of higher prices where no predetermined cost is agreed between divisions, this problem can arise in the short-term as well as the longer term. As the amount of profit for the supplying division is determined by the amount of cost incurred, this can lead to a situation where the division can actually increased its profit through greater inefficiency. The purchasing division must bear the burden of any increased costs in the supplying division and, unless these costs can be passed on to customers in the form of higher prices, profit of purchasing division will be reduced.
3. The price increasing means cost increases. In this contract supplying division is free to choose the quantity of labor, but wage and benefits are specified. Bhagat agreed to a 30 percent raise for workers, it against the contract. So Gina can negotiate the minimum volume of purchasing with Bhagat.
Part B
1. a. Current Average Product =Total product/quantity of input= (25×25×40)/25=1,000 Assume 1 unit increase in machines: Q=25×25× (40+1) =25625,
So Current Marginal product =25×25×41-25×25×40=625
b. With increasing returns to scale, a 1 percent change in all inputs results in a greater than 1 percent change in output. Assuming 100 workers and 100 machines produce 250000 guns. While 101 workers and 101 machines produce 255025, a 2 percent increase in output. c. Total cost: 25×3000+40×6000= 99000 Average cost: total cost/ quantity= 99000/ 25000= 3.96 Assuming the number of machine does not change, produce one additional cost: Marginal cost: change in total cost/change in output= 3 d. Many production functions display increasing marginal and average products over some ranges. However, most production functions reach a point after which the marginal product of an input declines. This observation often is called the law of diminishing returns. I think this production does not display this characteristic because this production functions can not decrease.
2. Four basic conditions:
A large number of potential buyers and sellers
Product homogeneity
Rapid dissemination of accurate information at low cost
Free entry into and exit from the market
3. The firm should operate in the short term, as long as it obtains enough profit to cover its total costs. Revenue in excess of variable costs helps to cover fixed costs which are incurred even if the firm does not operate.
4. No. The excess returns are likely to go to the manager. The manager's salary will be bid up by other firms who want the manager's services.
5. The optimal output of 76.92 is found by setting MR = MC: 1000 - 10Q = 3Q. The corresponding price of $615.40 is found from the demand curve. The profits are TR - TC = $47,336.57 - $8,875.03 = $38,461.54. (we are assuming that there are no fixed costs. Thus, total cost is the area under the marginal cost curve.)