University of Louisiana at Lafayette
Econ 528: Managerial Economics
Spring 2020
Final Exam Study Guide
1.Three graduate business students are considering operating a tofu burger stand in the Dalles, Oregon, windsurfing resort area during their summer break. This is an alternative to summer employment with a local
fruit cannery where they would earn $7,500 each over the three-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional projected costs are $2,000 for insurance, and 25¢ per unit for materials and supplies. Their tofu burgers would be priced at $1.50 per unit.
A.What is the accounting cost function for this business?
B.What is the economic cost function for this business?
C.What is the economic breakeven number of units for this operation? (Assume a $1.50 price and ignore interest costs associated with the timing of the lease payments.)
ANS:
A.The accounting cost function is:
Total Accounting
Cost= TCA =Fixed leasing plus
insurance costs+Variable materials
plus supplies costs
= $8,000 + $2,000 + $0.25Q
= $10,000 + $0.25Q
B.The economic cost function is:
Total Economic Cost = Summer employment opportunity cost + TC A
= 3(7,500) + $10,000 + $0.25Q
= $32,500 + $0.25Q
C.The economic breakeven point is reached when:
Q
= 26,000 units Page 1 of 16 2.Two graduate business students are considering opening a full-service car wash in Greenville, North Carolina, after graduation. This is an alternative to employment with a local manufacturing firm where they would each earn $70,000 per year. A fully equipped facility can be leased at a cost of $35,000 for the year. Additional projected costs are $15,000 for overhead, and $5 per automobile for materials and supplies. Full detail automobile cleaning would be priced at $25.
A.What is the accounting cost function for this business?
B.What is the economic cost function for this business?
C.What is the economic breakeven number of units for this operation? (Assume a $25 price and ignore interest costs associated with the timing of the lease payments.)3.
ANS:
A.The accounting cost function is:
Total Accounting
Cost= TCA =Fixed leasing plus
overhead costs+Variable materials
plus supplies costs
= $35,000 + $15,000 + $5Q
= $50,000 + $5Q
B.The economic cost function is:
Total Economic Cost = Employment opportunity cost + TC A
= 2($70,000) + $50,000 + $5Q
= $190,000 + $5Q
C.The economic breakeven point is reached when:
Q
= 9,000 automobiles
3.The Boston retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $1.80 per gallon and total cost
(TC) and marginal cost (MC) relations are:
TC = $400,000 + $1.64Q + $0.0000001Q2
MC = TC/
Q = $1.64 + $0.0000002Q Page 2 of 16 and Q is gallons of gasoline. Total costs include a normal profit.
A.Using the firm's marginal cost curve, calculate the profit-maximizing long-run supply from a typical retailer
B.Calculate the average total cost curve for a typical gasoline retailer, and verify that average total costs are less than price at the optimal activity level.4.
ANS:
A.The marginal cost curve constitutes the long-run supply curve for firms in perfectly competitive markets if price is greater than average total cost. Because P = MR, the price
necessary to induce firm supply in the long run of a given amount is found by setting P =
MC, provided that P > ATC:
P= $1.64 + $0.0000002Q
1.80= $1.64 + $0.0000002Q
0.16= 0.0000002Q
Q= 800,000
B.The average total cost curve is determined by dividing total cost by output:
ATC= ($400,000 + $1.64Q + $0.0000001Q2)/Q
= $400,000/Q + $1.64 + $0.0000001Q
At the Q = 800,000 activity level, average total cost is $2.22 and more than the market price:
ATC= $400,000/800,000 + $1.64 + $0.0000001(800,000)
= $2.22
Because P = MR = MC while P < ATC at the 800,000 gallons per year activity level, this
is not a sustainable amount of long-run supply from the typical gasoline retailer. Economic losses being suffered in the industry will cause exit until prices rise or costs fall sufficiently to ensure that only a normal profit is earned by each competitor in long-
run equilibrium.
4.Produce Pride, Inc., supplies sweet corn to canneries located throughout the Missouri River Valley. Like many grain and commodity markets, the market for sweet corn is perfectly competitive. With $500,000 in fixed costs, the company's total and marginal costs per ton (Q) are:
TC = $500,000 + $400Q + $0.04Q2
MC = TC/
Q = $400 + $0.08Q Page 3 of 16
