Review

Homework 2: Managerial Economics

Due Date: September 18, 2014

Question 1

Should the firm maximize total profits or profit per unit sold? Explain.

Question 2

The Artisanal Bologna Company (ABC) makes gluten free bologna using all natural ingredients. They sell bologna to high end delis for $22 per pound. Their costs are:

Production

(Q)

Total costs

18

21

24

26

28

30

32

34

36

40

44

48

Total Fixed

Costs

Average

Variable

Costs

433

466

505

535

568

604

643

684

729

828

940

1070

Average Total Costs

Marginal

Costs

NA

15

Table 1: Average and marginal costs: Artisanal Bologna Company.

a. Fill in the table.

b. Approximately what quantity of bologna maximizes profits?

c. Approximately what quantity of bologna maximizes average profit (profit per unit)?.

d. Explain why we choose the quantity in (b) and not (c).

e. Calculate the approximate break even point. Note: average variable costs are not

constant so you must calculate profits directly.

Question 3

A car dealer faces the following costs for Jeep Wranglers:

1

Item

Wholesale cost

Advertising

Dealer prep

Delivery cost

Salaries

Cost

$24,000 per Jeep

$10,000 per month

$200 per Jeep

$800 per Jeep

$10,000 per month

Table 2: Car Dealer’s costs.

Assume the retail price for a jeep is $27,000.

a. Write the total cost function.

b. Calculate the average fixed costs and average variable costs.

c. Find the break even point. That is how many Jeeps must be sold per month to break

even?

Question 4 (Requires Tuesday’s notes)

The Energy Information Administration (EIA) published cost estimates for various types of

electric power plants. Here is some actual data:

Installation Cost ($M)

Fixed Operating Cost ($M)

Average Variable Costs ($/mW)

Capacity (mW)

Single Unit

Pulverized Coal

2,110

25

4.47

650

Double Unit

Pulverized Coal

3,814

41

4.47

1,300

Dual

Nuclear

12,354

208

2.14

2,234

Table 3: Costs at alternative sized power...