A firm faces the following costs. Its total cost of capital = $1,000; its price paid for

Question:

A firm faces the following costs. Its total cost of capital = $1,000; its price paid for labor = $12 per labor unit; and its price paid for raw materials = $4 per raw‐material unit.

a. Suppose the firm can produce 5,000 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 5,000 units of output?

b. Now assume the firm improves its production process so that it can produce 6,000 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 6000 units of output?

c. If units of output can always be sold for $1 each, then by how much does the firm’s profit increase after it improves its production process?

d. Suppose that implementing the improved production process would require a one-time-only cost of $1,100. If the firm only considers this year’s profit, would the firm implement the improved production process? What if the firm considers its profit not just this year but in future years as well?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...