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# MBA FP6008 Assessment 4

The submission needs work, and I am unsure how to write the feedback. Certainly, your mastery of the math is very good. As stated elsewhere however, this is a course in economics, and the competencies that must be mastered in this assessment include the the theories, models, and practices of macro and micro economic theory and practice as they apply to corporate operations to create value for the firm.

What this means is that simple explanations of the formulas and statements that this is the way it is are not enough.

Consider how you would approach the problem if you were tasked to explain the information in the assessment to your CEO or Board of Directors.

You don't walk in and launch into the math or one-two sentence overviews of what is important to them for making real-world decisions.

You introduce the topic, explain what is going to take place/be discussed, and tell them why it is important for their decision-making processes. Then you tell them; taking the time to explain what is going on in terms that apply to their decision-making and operating activities.

You don't tell them all about the math.

That is what you need to do in these assessments. Tell about the problems from the point of view applicable to the decision-makers, not a mathematician or accountant.

Microeconomics of Customer Relationships

Assessment 4

Tracy A. Solomon

Capella University

Problem A[DJA1]

Choco[DJA2] Delite is a manufacturer of fine chocolates. I[DJA3] ts monthly rental expense is $1,000,000. It also has $2 million in fixed labor costs. Its marginal costs are $.70 per chocolate bar. If sales fall by 30 percent from 2 million chocolate bars per month to 1,400,000 chocolate bars per month, what happens to the AFC per chocolate bar? The MC per chocolate bar? What about the minimum amount that can be charged to break even on these costs?

Answer:

Total Fixed cost = $2 million + $1 million = $3 million[DJA4]

AFC (old) = $3 million / 2 million = $1.5

AFC (new) = $3 million / 1.4 million = $2.14

If sales fell by 30 percent to 1,400,000 bars per month, the AFC would increase to $2.14.

Since there is no variable cost, the marginal cost will remain at $0.70

The minimum amount that can be charged to break even will be the same as AFC. If sales fell by 30 percent to 1,400,000 bars per month, the minimum amount that can be charged to break even would increase to $2.14 per chocolate.

Problem B

Assume that the cost data in the table below are for a purely competitive producer:

1. How much economic profit can be achieved at each level of output?

Cost Data

Total

Average

Average

Average

Marginal

Price

Price–ATC

Product

Fixed Cost

Variable Cost

Total Cost

Cost

0

1

$25.00

$10.00

$35.00

$10.00

$35.00

$0.00

2

12.50

8.00

20.50

6.00

$41.00

$20.50

3

8.33

6.67

13.00

4.00

$45.00

$32.00

4

6.25

5.50

11.75

2.00

$47.00

$35.25

5

5.00

4.80

9.80

2.00

$47.00

$37.20

6

4.17

4.50

8.67

3.00

$50.00

$41.33

7

3.57

4.57

8.14

5.00

$55.00

$46.86

8

3.13

5.00

8.13

8.00

$63.00

$54.87

9

2.78

6.00

8.76

14.00

$77.00

$68.24

10

2.50

7.50

10.00

21.00

$98.00

$88.00[DJA5] [DJA6]

2. If price is $10.00 how much will be produced in the short run?

Price = $10

Quantity

Total Cost

Total Revenue

Economic Profit

1

35

10

-25

2

41

20

-21

3

45

30

-15

4

47

40

-7

5

47

50

3

6

50

60

10

7

55

70

15

8

63

80

17

9

77

90

13

10

98

100

2

Profit is maximized when the quantity = 8. Therefore 8 units will be produced in the short run.

3. Use the price of $4 to answer question a.

Price = $4

Quantity

Total Cost

Total Revenue

Economic Profit

1

35

4

-31

2

41

8

-33

3

45

12

-32

4

47

16

-31

5

47

20

-27

6

50

24

-26

7

55

28

-27

8

63

32

-31

9

77

36

-31

10

98

40

-58

Profit is maximized when the quantity = 6. Therefore 6 units will be produced in the short run.

Use the price of $14 to answer question a.

Price = $14

Quantity

Total Cost

Total Revenue

Economic Profit

1

35

14

-21

2

41

28

-13

3

45

42

-3

4

47

56

9

5

47

70

23

6

50

84

34

7

55

98

43

8

63

112

49

9

77

126

49

10

98

140

42

Profit is maximized when the quantity = 9 , Therefore, 9 units will be produced in the short run.

Problem C

Assume that a purely competitive firm is selling 2000 television sets a day at a cost of $90,000. Assume that if the firm sells 1600 units per day, its total cost would be $60,000, and if it sold 1000 units per day, it would have a total cost of $55,000.

1. Calculate the average total cost at these different sales levels.

2. Assuming that the cost structure for every firm in the industry is identical, do you think that the industry could be in long-run equilibrium?

3. If the industry is perfectly competitive, what would be the long-run equilibrium market price?

4. If your answer to c is the market price and every firm in the industry is earning a normal profit of 15 percent, calculate what that profit would be.

1: AVC = TC / Output

Output

Total Cost ($)

Average total Cost ($)

2000

90,000

45

1600

60,000

37.5

1000

55,000

55

2: Yes , the industry could be in the long could be in a long run equilibrium as ATC is having U shape.

3: Long run equilibrium market price = Minimum ATC = $37.5

Price = $37.5

4: Profit / unit = 15% of $37.5 = $5.625

Total profit = $5.625 X 1600 = $9000

References:[DJA7]

Ahleresten, K. (2008). Essentials of microeconomics. Publisher??? Retrieved from http://bookboon.com/en/textbooks/economics/microeconomics-uk

McAfee, P. R. (2006). Introduction to economic analysis. Publisher??? Retrieved from http://www.mcafee.cc/Introecon/IEA.pdf

Porter, M. E., & Kramer, M. R. (2011). CREATING SHARED VALUE. Harvard Business Review, 89(1/2), 62-77.

[DJA1]All submitted written work must include an introduction. Include all relevant facts, dates, persons, et cetera, and a statement of what you are doing and why. Avoid using the first person (Problem Preparation and Submission Guidelines, para. 2).

[DJA2]Incorrect indentation.

[DJA3]Incorrect sentence spacing.

[DJA4]Do not type formulas, equations, and calculations or show math or equal signs. Your client is not interested in reading formulas. (Problem Preparation and Submission Guidelines, para. 4).

[DJA5]Exceeds margins of the paper.

[DJA6]Table: In APA writing this is a Table and requires a specific Table Heading (APA 6e, p. 127-150).

[DJA7]Does not follow APA 6th Edition Standard for References Heading.

What this means is that simple explanations of the formulas and statements that this is the way it is are not enough.

Consider how you would approach the problem if you were tasked to explain the information in the assessment to your CEO or Board of Directors.

You don't walk in and launch into the math or one-two sentence overviews of what is important to them for making real-world decisions.

You introduce the topic, explain what is going to take place/be discussed, and tell them why it is important for their decision-making processes. Then you tell them; taking the time to explain what is going on in terms that apply to their decision-making and operating activities.

You don't tell them all about the math.

That is what you need to do in these assessments. Tell about the problems from the point of view applicable to the decision-makers, not a mathematician or accountant.

Microeconomics of Customer Relationships

Assessment 4

Tracy A. Solomon

Capella University

Problem A[DJA1]

Choco[DJA2] Delite is a manufacturer of fine chocolates. I[DJA3] ts monthly rental expense is $1,000,000. It also has $2 million in fixed labor costs. Its marginal costs are $.70 per chocolate bar. If sales fall by 30 percent from 2 million chocolate bars per month to 1,400,000 chocolate bars per month, what happens to the AFC per chocolate bar? The MC per chocolate bar? What about the minimum amount that can be charged to break even on these costs?

Answer:

Total Fixed cost = $2 million + $1 million = $3 million[DJA4]

AFC (old) = $3 million / 2 million = $1.5

AFC (new) = $3 million / 1.4 million = $2.14

If sales fell by 30 percent to 1,400,000 bars per month, the AFC would increase to $2.14.

Since there is no variable cost, the marginal cost will remain at $0.70

The minimum amount that can be charged to break even will be the same as AFC. If sales fell by 30 percent to 1,400,000 bars per month, the minimum amount that can be charged to break even would increase to $2.14 per chocolate.

Problem B

Assume that the cost data in the table below are for a purely competitive producer:

1. How much economic profit can be achieved at each level of output?

Cost Data

Total

Average

Average

Average

Marginal

Price

Price–ATC

Product

Fixed Cost

Variable Cost

Total Cost

Cost

0

1

$25.00

$10.00

$35.00

$10.00

$35.00

$0.00

2

12.50

8.00

20.50

6.00

$41.00

$20.50

3

8.33

6.67

13.00

4.00

$45.00

$32.00

4

6.25

5.50

11.75

2.00

$47.00

$35.25

5

5.00

4.80

9.80

2.00

$47.00

$37.20

6

4.17

4.50

8.67

3.00

$50.00

$41.33

7

3.57

4.57

8.14

5.00

$55.00

$46.86

8

3.13

5.00

8.13

8.00

$63.00

$54.87

9

2.78

6.00

8.76

14.00

$77.00

$68.24

10

2.50

7.50

10.00

21.00

$98.00

$88.00[DJA5] [DJA6]

2. If price is $10.00 how much will be produced in the short run?

Price = $10

Quantity

Total Cost

Total Revenue

Economic Profit

1

35

10

-25

2

41

20

-21

3

45

30

-15

4

47

40

-7

5

47

50

3

6

50

60

10

7

55

70

15

8

63

80

17

9

77

90

13

10

98

100

2

Profit is maximized when the quantity = 8. Therefore 8 units will be produced in the short run.

3. Use the price of $4 to answer question a.

Price = $4

Quantity

Total Cost

Total Revenue

Economic Profit

1

35

4

-31

2

41

8

-33

3

45

12

-32

4

47

16

-31

5

47

20

-27

6

50

24

-26

7

55

28

-27

8

63

32

-31

9

77

36

-31

10

98

40

-58

Profit is maximized when the quantity = 6. Therefore 6 units will be produced in the short run.

Use the price of $14 to answer question a.

Price = $14

Quantity

Total Cost

Total Revenue

Economic Profit

1

35

14

-21

2

41

28

-13

3

45

42

-3

4

47

56

9

5

47

70

23

6

50

84

34

7

55

98

43

8

63

112

49

9

77

126

49

10

98

140

42

Profit is maximized when the quantity = 9 , Therefore, 9 units will be produced in the short run.

Problem C

Assume that a purely competitive firm is selling 2000 television sets a day at a cost of $90,000. Assume that if the firm sells 1600 units per day, its total cost would be $60,000, and if it sold 1000 units per day, it would have a total cost of $55,000.

1. Calculate the average total cost at these different sales levels.

2. Assuming that the cost structure for every firm in the industry is identical, do you think that the industry could be in long-run equilibrium?

3. If the industry is perfectly competitive, what would be the long-run equilibrium market price?

4. If your answer to c is the market price and every firm in the industry is earning a normal profit of 15 percent, calculate what that profit would be.

1: AVC = TC / Output

Output

Total Cost ($)

Average total Cost ($)

2000

90,000

45

1600

60,000

37.5

1000

55,000

55

2: Yes , the industry could be in the long could be in a long run equilibrium as ATC is having U shape.

3: Long run equilibrium market price = Minimum ATC = $37.5

Price = $37.5

4: Profit / unit = 15% of $37.5 = $5.625

Total profit = $5.625 X 1600 = $9000

References:[DJA7]

Ahleresten, K. (2008). Essentials of microeconomics. Publisher??? Retrieved from http://bookboon.com/en/textbooks/economics/microeconomics-uk

McAfee, P. R. (2006). Introduction to economic analysis. Publisher??? Retrieved from http://www.mcafee.cc/Introecon/IEA.pdf

Porter, M. E., & Kramer, M. R. (2011). CREATING SHARED VALUE. Harvard Business Review, 89(1/2), 62-77.

[DJA1]All submitted written work must include an introduction. Include all relevant facts, dates, persons, et cetera, and a statement of what you are doing and why. Avoid using the first person (Problem Preparation and Submission Guidelines, para. 2).

[DJA2]Incorrect indentation.

[DJA3]Incorrect sentence spacing.

[DJA4]Do not type formulas, equations, and calculations or show math or equal signs. Your client is not interested in reading formulas. (Problem Preparation and Submission Guidelines, para. 4).

[DJA5]Exceeds margins of the paper.

[DJA6]Table: In APA writing this is a Table and requires a specific Table Heading (APA 6e, p. 127-150).

[DJA7]Does not follow APA 6th Edition Standard for References Heading.

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