Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
9th Edition
ISBN: 9781259290619
Author: Michael Baye, Jeff Prince
Publisher: McGraw-Hill Education
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Question
Chapter 5, Problem 22PAA
To determine
To find: The number of gallons that maximize profit.
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In the aftermath of a hurricane, an entrepreneur took a one-month leave of absence (without pay) from her $5,000-per-month job in order to operate a kiosk that sold fresh drinking water. During the month she operated this venture, the entrepreneur paid the government $2,500 in kiosk rent and purchased water from a local wholesaler at a price of $1.34 per gallon. Write an equation that summarizes the cost function for her operation, as well as equations that summarize the marginal, average variable, average fixed, and average total costs of selling fresh drinking water at the kiosk. If consumers were willing to pay $2.25 to purchase each gallon of fresh drinking water, how many units did she have to sell in order to turn a profit? Explain carefully
n the aftermath of a hurricane, an entrepreneur took a one-month leave of absence (without pay) from her $5,000-per-month job in order to operate a kiosk that sold fresh drinking water. During the month she operated this venture, the entrepreneur paid the government $2,500 in kiosk rent and purchased water from a local wholesaler at a price of $1.34 per gallon. Write an equation that summarizes the cost function for her operation, as well as equations that summarize the marginal, average variable, average fixed, and average total costs of selling fresh drinking water at the kiosk. If consumers were willing to pay $2.25 to purchase each gallon of fresh drinking water, how many units did she have to sell in order to turn a profit? Explain carefully. (LO1, LO3)
Consider the following cost function (C):
C= 0.25q3 - 4q? + 75q + F.
The equation for average cost (AC) is:
AC = |. (Properly format your expression using the tools in the palette. Hover over tools to see keyboard shortcuts. E.g., a superscript can be created
with the ^ character.)
The equation for variable cost (VC) is:
Vc=. (Properly format your expression using the tools in the palette.)
The equation for marginal cost (MC) is:
MC =. (Properly format your expression using the tools in the palette.)
Chapter 5 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
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- The chief economist for Argus Corporation, a large appliance manufacturer, estimated the firm’s short-run cost function for vacuum cleaners using an average variable cost function of the form AVC = a + bQ + cQ2 where AVC = dollars per vacuum cleaner and Q = number of vacuum cleaners produced each month. Total fixed cost each month is $180,000. The following results were obtained: DEPENDENT VARIABLE: AVC R-SQUARE F-RATIO P-VALUE ON F OBSERVATIONS: 19 0.7360 39.428 0.0001 VARIABLE PARAMETER ESTIMATE STANDARD ERROR T-RATIO P-VALUE INTERCEPT 191.93 54.65 3.512 0.0029 Q -0.0305 0.00789 23.866 0.0014 Q2 0.0000024 0.00000098 2.449 0.0262 d) If Argus Corporation produces 10,000 vacuum cleaners monthly, what is the estimated average variable cost?arrow_forwardFor the cost function C(Q) = 158 + 2Q + 2Q2, what is the average variable cost of producing 3 units of output? (Round your answer to two decimals as needed)arrow_forwardA study of the costs of electricity generation for a sample of 56 British firms in 1946-1947 yielded the following long-run cost function: (Source: Johnston, "Chapter 4," in Statistical Cost Analysis) AVC = 1.24 + 0.0033Q + 0.00000290² Q = output; measured in millions of kWh per year Z = plant size; measured in thousands of kilowatts where AVC = average variable cost (i.e., working costs of generation), measured in pence per kilowatt-hour (kWh). (A pence was a British monetary unit equal, at that time, to 2 cents U.S.) What is the long-run total variable cost function for electricity generation? 1.24 +0.0033 +0.0000029Q -0.000046Z 0.026Z 0.000182² Q Q Q ○ 0.0033 +20.0000029Q -0.000046 Z O 0.0033Q +20.00000290² - 0.000046 QZ O 1.24Q +0.0033Q² +0.0000029Q³ – 0.000046Q²Z – 0.026ZQ+0.00018Z²Q What is the long-run marginal cost function for electricity generation? 0.000046 QZ O 0.0033Q +20.0000029Q² +0.000046 QZ O 1.24 +0.0066Q+0.0000087Q² - 0.000092QZ – 0.026Z+0.00018Z2 O +0.0033…arrow_forward
- The average cost function for skateboards is given by: AC = (15)^2 - 30(15) + 350 = 225 - 450 + 350 = 125. The average cost at the minimum level of output is $125 per skateboard. The marginal cost function for skateboards is given by: MC = 3(15)^2 - 60(15) + 350 = 675 - 900 + 350 = 125 So, at q = 15, MC = AC = 125. this marginal cost curve intersects average cost at its minimum value. Draw and label the graph showing the average and marginal cost curves for skateboard production.arrow_forwardGive the formulas for average fixed cost (AFC), marginal cost (MC), average variable cost (AVC), and average cost (AC) if the cost function is: 26.00 24.00- C=6+13q. 22.00 Average fixed cost is: 20.00- 18.00 AFC = * 16.00 Marginal cost is: 14.00- MC = 10.00 Average variable cost is: 8.00 6.00- AVC = 4.00 Average cost is: 2.00 0.00- AC =D Quantity, q. Units per day 1.) Use the line drawing tool to draw the marginal cost curve. Label this line 'MC'. If you are viewing this on a test or quiz, you must click the graph to enable the drawing tools. 2.) Use the 3-point curved line drawing tool to draw the average cost curve for quantities q= 1, q = 2, and q = 3. Label this curve 'AC'. Carefully follow the instructions above, and only draw the required objects. étv 20 MacBook Air S0 DII F3 F4 FS F6 F7 FB F9 2$ & 3 4 7 8 9 { [ W E R T Y U P D F G H J K ? C V N command option .. .. Cost per unit, $ * 0Oarrow_forwardA firm's average cost (AC) per unit of output depends on the number of hours of skilled labor (S) and the number of hours of unskilled labour (U) employed in the production process. The firm's AC function is defined below. Determine the quantities of the two inputs that will result in production at the lowest possible average cost and determine the associated minimum average cost. AC = 3S2 + 2U2 - 2SU - 2S - 6U + 20arrow_forward
- Give the formulas for and plot AFC, MC, AVC, and AC if the cost function is a C = 10+10q (MC = 10) b C = 10 + q2 (MC=2q). c C = 10 + 10q - 4q2 + q3 (MC = 10 - 8q + 3q2). ATC AVC AFCarrow_forwardSuppose a Cobb-Douglas Production function is given by the function: P(L,K)=8L^0.7K^0.3Furthemore, the cost function for a facility is given by the function:C(L,K)=300L+500KSuppose the monthly production goal of this facility is to produce 20,000 items. In this problem, we will assume LL represents units of labor invested and KK represents units of capital invested, and that you can invest in tenths of units for each of these. What allocation of labor and capital will minimize total production Costs?Units of Labor LL = (Show your answer is exactly 1 decimal place)Units of Capital KK = Incorrect (Show your answer is exactly 1 decimal place)Also, what is the minimal cost to produce 20,000 units? (Use your rounded values for LL and KK from above to answer this question.)The minimal cost to produce 20,000 units is $ Hint: Your constraint equation involves the Cobb Douglas Production function, not the Cost function. When finding a relationship between LL and KK in your system of…arrow_forward
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