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Exercise 6: Costs & Competition Name: Problem 6.1. Tommy runs a small metal shop fabricating custom gates and other decorative work. Tommy has one assistant paid $48,000 per year, annual rent for the shop of $20,000 per year, and annual materials cost of $80,000 per year. He has $100,000 of his own funds invested in equipment (tools, furnace, anvils) that could earn him $10,000 per year if alternatively invested. Total annual sales revenue for the firm's products is $300,000. Tommy could earn $75,000 per year working for a competing metal firm, and he estimates his entrepreneurial skills to be worth $5,000 per year. (a) Which of the following are explicit costs for the firm? Rent Assistant Equipment Entrepreneurial skill (b) Calculate the accounting profit for Tommy's firm. (c) Calculate the economic profit for Tommy's firm. (d) If these figures cover all costs and benefits, at what salary would Tommy close his business and go and work for a competitor? Problem 6.2. A profit-maximizing florist in a competitive market is currently producing 100 bouquets per week. Revenue per bouquet is $10, average total cost is $8, and fixed costs are $200. (a) What are firm profits? (b) What is marginal cost? (c) What is average variable cost? (d) Is the efficient scale of the firm more than, less than, or exactly 100 units? Problem 6.3. The table below shows marginal and average total costs for a bakery selling cupcakes in a competitive market. Market price is $3.50 per cupcake. $ (c) If the firm increases output from 2 to 3, how much extra revenue is earned? |$ MO (d) How many units does the firm produce when mar- ket price is $3.5? What are firm profits P + MR at that price? |$ (e) How many units does the firm produce if the mar- ATO ket price falls to $2? What are firm profits at that price? $ (f) How low can cupcake prices fall before the firm Cupcakes can't break even and must exit the market? (a) What is the marginal cost of the 5th unit? $ $ (g) Illustrate the break-even price on the y-axis of the graph. (b) What are total costs when output is 4