Ball Bearings, Inc., faces costs of production as follows: Quantity

Total Fixed Costs

Total Variable Costs

(Dollars)

(Dollars)

0 100 0
1 100 50
2 100 70
3 100 90
4 100 140
5 100 200
6 100 360
Complete the following table by calculating the companyâs total cost, marginal cost, average fixed cost, average variable cost, and average total cost at each level of production.

Quantity

Total Cost

Marginal Cost

Average Fixed Cost

Average Variable Cost

Average Total Cost

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

0
1
2
3
4
5
6
The price of a case of ball bearings is $50. Seeing that he canât make a profit, the company's chief executive officer (CEO) decides to shut down operations.

The firmâs profit in this case is $(Fill in the blanks with the dollar amount) (Note: If the firm suffers a loss, enter a negative number in the previous cell.)

True or False: This was a wise decision.

True

False

Vaguely remembering his introductory economics course, the company's chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity.

At this level of production, the firmâs profit is.$(fill in the blanks with the dollar amount) (Note: If the firm suffers a loss, enter a negative number in the previous cell.).

True or False: This is the best decision the firm can make.

True

False

Q        Fixed       Variable    Total    Marginal    Aver.     Aver.     Aver.

          Costs        Costs         Cost    Cost           FC         VC         TC      

0          100             0              100         -               -             -             -

1           100           50               150       150           100         50         150

2          100           70               170         20            50         35          85

3          100           90               190        20           33.33      30        63.33

4          100          140               240       50            25          35          60

5          100         200               300       60            20          40          60

6          100         360              460      160           16.67       60        76.67

The firm's profit in this case is -$360.

True or False: This was a wise decision. ⇒ False

Depends on the situation and which costs are avoidable if the company shuts down operations. If it produces 4 cases, the losses reduce from -$100 to -$40, but the contribution margin is positive since revenues exceed variable costs by $60. But under the current price level, the company will not be able to generate profits unless it increases its sales price or decreases its fixed costs.

Vaguely remembering his introductory economics course, the company's chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity.

At this level of production, the firm's profit is -$100.

True or False: This is the best decision the firm can make. ⇒ False

Accounting profit is maximized at 4 cases since marginal cost ($50) = sales price ($50). At this point the total profit is -$40.