Problem Set - Cost

Sloth Exercise Machine Company is trying to decide how many exercise machines to produce to succeed in the mirror market in both the short run and long run.

Fill in the Marginal Cost and Average Cost information in chart below and graph them in the space to the right.

1. What the fixed costs for this company? What does this imply about the company’s ability to change capital?

2. What is the lowest price the Sloth Exercise Machine Company can charge for enchanted mirrors?

3. Suppose the market price for exercise machines is $5. How many mirrors should the Sloth Exercise Machine Company make? What is the relationship between the marginal cost and the price at that quantity?

The manager at the Sloth Exercise Machines Company is so impressed by your business sense that he tells you his brother is selling his company – the Big Belly Chair Company. In an effort to convince you of the potential profitability of the company, he shows you the total cost curve for the Big Belly Chair Company in the hope that you will buy the company:

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1. What is the equation for the marginal cost curve? What does the marginal cost curve show?

2.What is the equation for the average cost curve? Why is it important to know information about average cost?

3.If you were running this company, what would be the minimum price that you could sell chairs at (assuming you could live without a profit)?

4. Are there any fixed costs for the Big Belly Chair Company? What might this mean about the ability of Big Belly Chairs to adjust to changes in the chair market?

5. Assume that the production function (and costs) for Big Belly Chair Company is similar to other chair companies. Based on this, do you think it would be easy for new chair companies to enter the market?

6. What effect do you think this will have on the ability of Big Belly Chair Company to make a profit in the long run?

Pizza places often offer deals where the first pizza is full price (around $10) and the second is half price (around $5). Use the ideas of fixed cost, variable cost, average cost and marginal cost to explain why they would have this policy rather than simply charging a middle price (around $7.50) for all pizzas?