Work It Out Chapter 12

Question 1 of 5

Work It Out

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Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompanying table.

Quantity of Meals	VC
0	$0
10	200
20	300
30	480
40	700
50	1,000

Table

Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output. (Include two decimals in your answers.)

Quantity of Meals	VC	TC of meal	MC of meal	AVC of meal	ATC of meal
0	$0	$	-	-	-
10	200		$	$	$
20	300
30	480
40	700
50	1,000

Table

To find total cost, for each level of output add the fixed costs of $100 to variable costs. Marginal cost is calculated as ΔTC/ΔQ. As the quantity of meals increases from 0 to 10, total costs increase from $100 to $300, so marginal costs are ($300 - $100)/($10 - 0) = $20.00. For this problem the change in quantity will be 10. Both AVC and ATC are calculated by dividing VC and TC by quantity at each level of output, respectively. For further review see section, “Using Marginal Analysis to Choose the Profit-Maximizing Quantity of Output.”

Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output. (Include two decimals in your answers.)

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Quantity of Meals	VC	TC of meal	MC of meal	AVC of meal	ATC of meal
0	$0	100.00	--	--	--
10	200	300.00	$20.00	$20.00	$30.00
20	300	400.00	10.00	15.00	20.00
30	480	580.00	18.00	16.00	19.33
40	700	800.00	22.00	17.50	20.00
50	1,000	1,100.00	30.00	20.00	22.00

Table

Using the table from your answer in the last part; what is the break-even price? What is the shut-down price? (Round your answer to two decimal places.)

Break-even price: $

Shut-down price: $

Correct! For further review see, “The Short-Run Production Decision.“

Incorrect. The break-even price is also the point that corresponds with the minimum average variable cost. The minimum average total cost occurs at 30 meals with a price of $19.33. The shut-down price is also the minimum average variable cost; any price below this point will cause the firm to lose money in their daily operations. For Kate, her shut-down price occurs at an output of 20 meals and a price of $15.00. For further review see, “The Short-Run Production Decision."

Using the table from your answer in the last part; what is the break-even price? What is the shut-down price? (Round your answer to two decimal places.)

Correct! For further review see, “The Short-Run Production Decision.“

Using the table from your answer in the last part; what is the break-even price? What is the shut-down price? (Round your answer to two decimal places.)

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Quantity of Meals	VC	TC of meal	MC of meal	AVC of meal	ATC of meal
0	$0	$100.00	--	--	--
10	200	300.00	$20.00	$20.00	$30.00
20	300	400.00	10.00	15.00	20.00
30	480	580.00	18.00	16.00	19.33
40	700	800.00	22.00	17.50	20.00
50	1,000	1,100.00	30.00	20.00	22.00

Table

Suppose that the price at which Kate can sell catered meals is $21 per meal. Which of the following statements is true?

When the price is $21, Kate will make a profit: the price is above her break-even price.

When the price is $21, Kate should shut down: the price is below her break-even price.

When the price is $21, Kate will make a profit in the short run but a loss in the long run: the price is between her break-even and shut down prices.

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Quantity of Meals	VC	TC of meal	MC of meal	AVC of meal	ATC of meal
0	$0	$100.00	--	--	--
10	200	300.00	$20.00	$20.00	$30.00
20	300	400.00	10.00	15.00	20.00
30	480	580.00	18.00	16.00	19.33
40	700	800.00	22.00	17.50	20.00
50	1,000	1,100.00	30.00	20.00	22.00

Table

Suppose that the price at which Kate can sell catered meals is $18 per meal. In the short run, Kate should produce meals. Kate should (shut down or produce) in the short-run and (shut down or produce) in the long run

Correct! For further review see, “The Short-Run Production Decision."

Incorrect. When the price is $18, Kate will incur a loss: the price is below her break-even price of $19.33. But since the price is above her shut-down price of $15.00, Kate should produce in the short run, not shut down. For further review see, “The Short-Run Production Decision."

Suppose that the price at which Kate can sell catered meals is $18 per meal. In the short run, Kate should produce _______ meals. Kate should (shut down or produce) _______ in the short-run and (shut down or produce) _______ in the long run

Correct! For further review see, “The Short-Run Production Decision."

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Quantity of Meals	VC	TC of meal	MC of meal	AVC of meal	ATC of meal
0	$0	$100.00	--	--	--
10	200	300.00	$20.00	$20.00	$30.00
20	300	400.00	10.00	15.00	20.00
30	480	580.00	18.00	16.00	19.33
40	700	800.00	22.00	17.50	20.00
50	1,000	1,100.00	30.00	20.00	22.00

Table

Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, Kate should produce meals. Kate should (shut down or produce) in the short-run and (shut down or produce) in the long run

Correct! For further review see, “The Short-Run Production Decision."

Incorrect. When the price is $13, Kate would incur a loss if she were to produce: the price is below her break-even price of $19.33. And since the price is also below her shut-down price of $15.00 she should shut down in the short run. For further review see, “The Short-Run Production Decision>"

Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, Kate should produce ______ meals. Kate should (shut down or produce) ______ in the short-run and (shut down or produce) ______ in the long run

Correct! For further review see, “The Short-Run Production Decision."

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Work It OutChapter 12

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