Microeconomic decision-makers - Firms'' costs, revenue and objectives (3)
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1.
Question 2
A firm has a total revenue of £500 and produces 100 units. Calculate the firm’s Average Revenue (AR). Assume the firm has a fixed cost of £100. If the firm produces 150 units, what is the new Average Total Cost (ATC)?
Calculation of AR:
AR = Total Revenue / Quantity
AR = £500 / 100 = £5
Calculation of ATC at 150 units:
First, we need to calculate the total cost (TC) at 100 units. We know that TR = P x Q, so P = TR/Q = £500/100 = £5. Therefore, TC = Fixed Cost + Variable Cost. Since TR = P x Q, and P = £5, then Q = TR/P = 100/5 = 20. Therefore, Variable Cost = Total Cost - Fixed Cost = £100 - £20 = £80. The variable cost per unit is £80/100 = £0.80. The total cost at 100 units is £100 + (£0.80 x 100) = £180. The average total cost at 100 units is £180/100 = £1.80. However, the question asks for the ATC at 150 units. We need to know the total cost at 150 units. We can assume a constant marginal cost. Since the variable cost per unit is £0.80, the total variable cost at 150 units is £0.80 x 150 = £120. Therefore, the total cost at 150 units is £100 + £120 = £220. The ATC at 150 units is £220/150 = £1.47 (approximately). Alternatively, we can calculate the ATC at 100 units as £1.80. If the variable cost per unit is constant, then the ATC will be lower at 150 units. However, without more information, we cannot be certain of the exact ATC at 150 units.
2.
Question 2: A local bakery is considering whether to increase its production to meet growing demand. Discuss the potential benefits and drawbacks of the bakery pursuing the objective of growth.
Benefits of pursuing growth:
- Increased Profitability: Higher production can lead to increased sales and potentially higher profits.
- Increased Market Share: Growth allows the bakery to capture a larger portion of the market.
- Economies of Scale: Producing more goods can lead to lower average costs per unit due to spreading fixed costs over a larger output.
- Enhanced Reputation: Successful growth can enhance the bakery's reputation and brand image.
Drawbacks of pursuing growth:
- Increased Costs: Growth requires investment in new equipment, staff, and potentially larger premises, leading to higher costs.
- Quality Control Issues: Expanding production can sometimes lead to a decline in product quality if not managed carefully.
- Management Challenges: Managing a larger operation can be more complex and require stronger management skills.
- Increased Competition: Successful growth may attract more competitors to the market.
The bakery needs to carefully weigh these benefits and drawbacks before deciding whether to pursue growth. A thorough market analysis and financial planning are essential.
3.
Question 1
A firm sells 200 units of a product for £5 each. The firm’s total revenue is £1000. Calculate the firm’s Average Revenue (AR) and Average Total Cost (ATC) at this level of output. Explain, briefly, why the AR might be different from the price.
Calculation of AR:
AR = Total Revenue / Quantity
AR = £1000 / 200 = £5
Calculation of ATC:
The question does not provide information about the firm's costs. Therefore, we cannot calculate the ATC. However, we can state that ATC is the total cost divided by the quantity produced.
Explanation of AR vs. Price:
The AR is equal to the price when the firm sells the product at a constant price. However, if the firm has to lower the price to sell more units (due to market conditions or increased supply), the AR will be less than the price. This is because the firm needs to lower the price to attract more customers, and the overall revenue might not increase proportionally.