MANAGEIAL ECONOMICS (H.CRAIG PETERSEN, W.

CRIS LEWIS)CHAPTER#7
COST THEORY AND ANALYSISSOLUTIONPROBLEMS
7-1
Y=A+BXWe can calculate total cost by the method of linear regression with the help of
financialcalculator.TC=1000+80QTFC=1000TVC=80QAVERAGE TOTAL
COST=TC/QTC= (1000+80Q)/QATC=1000/Q+80AVERAGE FIXED
COST=TFC/QAFC=1000/QAVERAGE VARIABLE COST=TVC/Q80Q/Q=80MC=CHG
TC/CHG QRATE OF OUTPUT TOTAL COST MARGINAL COST0 1000+80(0)=1000 -2
1000+80(2)=1160 804 1000+80(4)=1320 807 1000+80(7)=1560 8010 1000+80(10)=1800 80

 
7-2
Y=A+BXFC=5000We can calculate total variable cost by the method of linear regression with
the help of financialcalculator.TC=5000+1000QAVERAGE TOTAL COST=TC/QTC=
(5000+1000Q)/QATC=5000/Q+1000AVERAGE VARIABLE
COST=TVC/Q1000Q/Q=1000MC=CHG TC/CHG QRATE OF OUTPUT TOTAL COST
MARGINAL COST1 5000+1000(1)=6000 -2 5000+1000(2)=7000 10003
5000+1000(3)=8000 10004 5000+1000(4)=9000 10005 5000+1000(5)=10000 1000
7-3
TC=200+5Q-0.04Q^2+0.001Q^3MC=5-0.08Q+0.003Q^2a)
 
ATC , AVC , AFC , FCFC=200AVERAGE TOTAL COST=TC/Q(200+5Q-
0.04Q^2+0.001Q^3)/QATC=200Q^-1+5-0.04+0.001Q^2AFC=200Q^-1

 
AVERAGE VARIABLE COST=TVC/Q(5Q-0.04Q^2+0.001Q^3)/QAVC=5-
0.04Q+0.001Q^2b)
 
AVC=MC5-0.04Q+0.001Q^2=5-0.08Q+0.003Q^20.04Q-0.002Q^2=0Q(0.04-
0.002Q)=00.04=0.002QQ=20C) IF FC=500 THE RESULT WOULD BE SAME
7-4
TR=50QTC=10000+30QA)
 
TR=TC50Q=10000+30QQ=500B)
 
Q=FC+PROFIT/P-AVC10000+20000/50-30Q=1500
7-5
TFC=20, P=10, PROFIT=2A)
 
BREAKEVEN OUTPUT=FC/P-VCCM=P-VC2=10-VCVC=8BREAKEVEN
OUTPUT=20/10-8=10B)
 
PROFIT ELASTICITY=Q(P-VC)/Q(P-VC)-TFC20(10-8)/20(10-8)-2040/20
 
=2
7-6
A)
 
BREAKEVEN OUTPUT=FC/P-VCi)
 
500000/40-3=13513.5ii)
 
510000/40-2=13421.0iii)
 
380000/40-7=11515.1iv)
 
200000/40-3=5405.4B)
 
TO INCREASE THE SIZE OF BUDJET,STUDENT MUST INCREASE AND
FIXEDCOST CAN BE CONTROL BY INCREASING THE WORKING HOURS
OFFACULTY.C)
 
ADV: EDUCATION COST WILL INCREASE SO THERE WILL BE MORE PROFIT.
7-7
P=20A)
 
BREAKEVEN OUTPUT=FC/P-VCi)
 
200/20-15=40ii)
 
500/20-10=50iii)
 
1000/20-5=67B)
 
PROFIT ELASTICITY=Q(P-VC)/Q(P-VC)-TFCi)
 
200(20-15)/ 200(20-15)-200=1.25ii)
 
200(20-10)/ 200(20-10)-500=1.33iii)
 
200(20-5)/ 200(20-5)-1000=1.5C)
 
Highly leveraged is (ii) and least leveraged is (i)
7-8
TR=2000000TC=400000+1010000ECONOMIC PROFIT=TR-TC2000000-400000-
1010000ECONOMIC PROFIT=590000Office should be opened.
 
7-9
A)
 
ACCOUNT PROFIT=10000 , SALARY=20000 , RATE OF
INTEREST=15%of 80000=12000ACCOUNT PROFIT 10000SALARY FORGONE
(20000)RATE OF INTEREST (12000)ECONOMIC PROFIT (32000)B)
 
TO have economic profit at breakeven point so we will assume it 0 and we have to doreverse
calculation to calculate account profit.ACCOUNT PROFIT
32000
 SALARY FORGONE 20000RATE OF INTEREST 12000ECONOMIC PROFIT (0)
REVERSES CALCULATION
7-10
P=80, FC=200000, PROFIT=32A)
 
PROFIT ELASTICITY=Q(P-VC)/Q(P-VC)-TFCi)
 
8000(80-48)/ 8000(80-48)-200000=4.57ii)
 
10000(80-48)/ 10000(80-48)-200000=2.60iii)
 
12000(80-48)/ 12000(80-48)-200000=2.08B)
 
FC=300000 VC=48-8=40 P=80i)
 
8000(80-40)/ 8000(80-40)-300000=16ii)
 
8000(80-40)/ 8000(80-40)-300000=4iii)
 
8000(80-40)/ 8000(80-40)-300000=2.66C)
 
Company increase risk and return by making investment in capital.
7-11
A)
 
BREAKEVEN OUTPUT=FC/P-VC10000/(900-700)=50B)
 
Assume Q=52PROFIT ELASTICITY=Q(P-VC)/Q(P-VC)-TFC52(900-700)/52(900-700)-
10000=26%As Q increases profit elasticity declinesC)
 
Q=60 , FC=11000 VC=70060(900-700)/60(900-700)-11000=12%Q=60, FC=10000
VC=40060(900-400)/60(900-400)-10000=1.5%

 
PROVED
7-12
ADD FLIGHTS
7-13
A=TC=1000+0.03QB=TC=300+0.04QC=TC=100+0.05QB=C300+0.04Q=100+0.05QQ=2
0000If Q is less than 20000 than B is less than
CA=B1000+0.03Q=300+0.04Q700=0.01QQ=70000If Q is less than 70000 than B is less
than A
7-14
PROFIT+FIXED COST=100000UNITS=10000VARIABLE COST=4VARIABLE
COST=10000*4=40000P=?
TR=140000TR=P*Q140000=P*10000P=140000/10000P=14PROFIT+FIXED
COST=100000UNITS=11000VARIABLE COST=4VARIABLE
COST=11000*4=44000P=?
TR=144000TR=P*Q144000=P*10000P=144000/10000P=13.09CHG IN PRICE=14-
13.09CHG PRICE=0.90CHG IN PRICE= (14-13.09)*11000
 
CHG IN PROFIT=100001
7-15
a)
 
TC=200Q-0.004Q^2LONGRUN AVERAGE COST=TC/QLAC=200-0.004Q^2
7-16
TC=200-2Q+0.05Q^2A)
 
AC=TC/QAC=200Q^-1-2+0.05Q
AC’=
-200Q^-2-2+0.05Q=0=-200/Q^2+0.05Q=00.05Q=200/Q^2SQ 4000=Q^2Q=63.2B)
 
AC=200Q^-1-2+0.05QSO -1+1=0DECREASING RETURN TO SCALEC)
 
MKT PRICE=4.32AC=200/63.2-2+0.05 (63.24)3.162-2+3.162=4.32
7-17
TC=100Q-3Q^2+0.01Q^3MC=100-6Q+0.03Q^2AC=TC/Q100-3Q+0.1Q^2WE CAN
SOLVE THIS BY 2 METHODSi)
 
By taking AC’
 ii)
 
AC=MC
WE WILL COLVE THIS BY AC’
 -3+0.2Q=00.2Q=3Q=15
7-18
FC=25000TVC=0.15Q+0.1Q^2ATC=TC/Q
 
TC=25000+0.15Q+0.1Q^2ATC=25000Q-1+0.15+0.1Q-
25000/Q^2+0.1=025000/Q^2=0.125000/0.1=Q^2Q=500
7-19
TR=TCP*Q=1000+200Q-9Q^2+0.25Q^3P= (1000+200Q-
9Q^2+0.25Q^3)/QP=1000/Q+200-9Q+0.25Q^2VC=200Q-9Q^2+0.25Q^3AVC=200-
9Q+0.25Q^2
AVC’=
-9+0.5Q=00.5Q=9Q=18P=1000/18+200-9(18)+0.25(18)^2P=174.5
7-20
A)
 
ECONOMIC PROFIT=TR-TC20Q-16+17Q-9Q^2+Q^3ECONOMIC PROFIT=3Q-16-
9Q^2+Q^3B)
 
MC=17-18Q+3Q^2C)
 
Q=8AVC=17-9Q+Q^2=17-9*8+8^2=9