Essentials of Economics
Essentials of Economics
4th Edition
ISBN: 9781464186653
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
Book Icon
Chapter 7, Problem 5P
To determine

Concept Introduction

Marginal Cost: This refers to the change in the cost which is incurred when an additional unit of any good or service is produced. It shall be calculated as follows:

    Essentials of Economics, Chapter 7, Problem 5P , additional homework tip  1

Shut-down Price: This is the level of price when the revenue is equal to the variable cost. This happens when the price is equal to the lowest average variable cost. When the price falls below this level, the production of goods shall shut-down.

Expert Solution & Answer
Check Mark

Explanation of Solution

a. Graph to show Bob’s marginal cost curve.

The below table shows the calculation of marginal cost:

    Quantity Produced(A)Change in Quantity(B)Fixed Cost($)(C)Variable Cost($)(D)Total Cost($)(E)Essentials of Economics, Chapter 7, Problem 5P , additional homework tip  2Change in Total Cost($)(F)Marginal Cost($)Essentials of Economics, Chapter 7, Problem 5P , additional homework tip  3
    0 - 50,000 0 50,000 - -
    1,000 1,000 50,000 5,000 55,000 5,000 5
    2,000 1,000 50,000 8,000 58,000 3,000 3
    3,000 1,000 50,000 9,000 59,000 1,000 1
    4,000 1,000 50,000 14,000 64,000 5,000 5
    5,000 1,000 50,000 20,000 70,000 6,000 6
    6,000 1,000 50,000 33,000 83,000 13,000 13
    7,000 1,000 50,000 49,000 99,000 16,000 16
    8,000 1,000 50,000 72,000 122,000 23,000 23
    9,000 1,000 50,000 99,000 149,000 27,000 27
    10,000 1,000 50,000 150,000 200,000 51,000 51

As per the marginal cost calculated in the above table, below is the graph that shows Bob’s marginal cost curve:

Essentials of Economics, Chapter 7, Problem 5P , additional homework tip  4

Fig 1

Conclusion:

Thus, the above graph shows the marginal curve drawn from the marginal costs calculated.

b. Range of price over which Mr. Bob will produce no units.

The below table shows the calculation of average variable cost:

    Quantity Produced(A)Variable Cost($)(B)Average Variable Cost($)Essentials of Economics, Chapter 7, Problem 5P , additional homework tip  5
    0 0 0
    1,000 5,000 5
    2,000 8,000 4
    3,000 9,000 3
    4,000 14,000 3.5
    5,000 20,000 4
    6,000 33,000 5.5
    7,000 49,000 7
    8,000 72,000 7
    9,000 99,000 11
    10,000 150,000 15

Shut-down price is the level when the price is equal to the lowest average variable cost. Thus, as per the above table, the shut-down price is $3.

Mr. Bob will not produce any quantity when the price of a product falls below the shut-down price, which is $3. Hence, the range of price over which there will be no production is $0 to $3.

Conclusion:

Thus, the range of prices where there will be no production is $0 to $3.

c. Graph to show Mr. Bob’s individual supply curve.

The below table shows the marginal cost and average variable cost of Mr. Bob:

    Quantity ProducedMarginal Cost($)Average Variable Cost($)
    0 - 0
    1,000 5 5
    2,000 3 4
    3,000 1 3
    4,000 5 3.5
    5,000 6 4
    6,000 13 5.5
    7,000 16 7
    8,000 23 7
    9,000 27 11
    10,000 51 15

As per the marginal cost and average variable cost in the above table, below is the graph that shows Bob’s individual supply curve:

Essentials of Economics, Chapter 7, Problem 5P , additional homework tip  6

Fig 2

  • The above graph shows that Mr. Bob will continue the production only if the price is above $3 which is the shut-down price.
  • Hence, the production level at prices below the shut-down price of $3 is nil.

Conclusion:

Thus, the graph is shown for Mr. Bob’s individual supply curve.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education