Costs of Production

In the short run, all firms encounter both fixed costs and variable costs. However, which of their costs are considered fixed and which are variable. Access the web site Supermarket Operating Costs and after printing out this page indicate next to each expense whether it is a fixed or variable cost. If you believe any particular expense could be either a fixed or a variable cost, indicate why you believe this.

After you have completed the above, complete the following cost of production simulation.
Units of Labor Output
0 0
100 2,000
200 4,400
300 7,200
400 10,400
500 14,000
600 17,200
700 20 000
800 22,400
900 24,400
1000 26 000
1100 27,400
1200 28,600
1300 29,600
1400 30,400
1500 31,000
1600 31,400
1700 31,600
1800 31,600
1900 31,400
  1. Last year 14 million units of Bremer's Brew were sold for a total of $87,000,000. This required $34,000,000 in raw materials, $22,000,000 for packaging and marketing, $7,000,000 in research and development, and $12,000,000 in production labor costs. Also depreciation is 10% annually on plant and equipment that cost $60,000,000. Accounting profit for Bremer's Brew is:

     

  2. Entrepreneur Bremer cashed in $72,000 of securities to buy some of the machinery for this business. The securities earned 10% interest. Did the company earn an economic profit, break even, or suffer an economic loss? How much was the economic profit or economic loss?

     

  3. Using the company's production table that is shown above, at what employment level is the marginal product of labor the highest? - 400 workers; 500 workers; 700 workers; or 800 workers
    What does the marginal product of labor equal at its maximum?

     

  4. At what level of employment is average physical product at its maximum? -400 workers; 600 workers; 800 workers; or 1000 workers
    What is the average product at its maximum?

     

  5. At what level of employment does the marginal product fall to zero?

     

  6. Assume that the plant currently employs 1,000 workers and the product sells for $6 per unit. How many units will these workers produce per hour?

     

  7. Ingredients and packaging cost $4.40 per unit and labor costs $15 per hour. These are the only variable costs that concern you at this time. What is the total variable cost (TVC) per hour given that the plant currently employees 1,000 workers?

     

  8. What is the average variable cost per unit when 1,000 workers are employed?

     

  9. If materials and packaging are a constant $4.40 per unit then what is the marginal cost per unit when 1,000 workers ($15 per hour) are employed?

     

  10. Which of the following costs may be falling when MC>AVC? - TFC; TVC; AVC; or ATC

     

  11. Bremer's production will be 52 million units this year. Fixed costs are $6 million in depreciation; $11 million in marketing; $7 million in research and development; and $8 million for the opportunity cost of the capital that the owners have pumped into buildings and machinery. What is the AFC for this product?
    What is the ATC at this level of production?

     

  12. If the product sells for $6 per unit and we expect to sell 52 million units, how much economic profit per unit will be realized?
    If 52 million units are sold, what will total economic profit be?

     

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Last updated October 10, 2003

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