mike asked in Social ScienceEconomics · 7 years ago

Economics question average fixed cost?

Please do not provide only answers, I need to know HOW to do this

You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $600,000 per month, and you have contractual labor obligations of $1,000,000 per month that you can’t get out of. You also have a marginal printing cost of $0.25 per paper as well as a marginal delivery cost of $0.1 per paper. If sales fall by 20 percent from 1,000,000 papers per month to 800,000 papers per month, what happens to the Average Fixed Costs per paper?

Instructions: Round your answers to two decimal places.

Average Fixed Costs (Rises or falls) per paper from $ per paper to $ per paper.

What happens to the MC per paper?

What happens to the minimum amount that you must charge to break even on these costs?

Instructions: Round your answers to two decimal places.

The amount (Rises or falls) from $ per paper to $ per paper.

1 Answer

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  • 7 years ago
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    Average fixed cost (AFC) is fixed cost/quantity. Fixed cost is the cost that's the same no matter how much you produce. So the fixed cost here is the cost of the factory, $600,000 + labor obligations of $1,000,000 = $1,600,000. So at AFC at 1,000,000 papers is $1.6/paper and at 800,000 it goes up to $2.

    Marginal Cost (MC) is that cost that is added to the total cost of producing one more paper, so $.25 to bring and $.1 to deliver so $.35 total. MC stays the same at any production level.

    To determine the minimum amount needed to charge to break even Price=(MC+TFC)/Quantity.

    Price=($.35x + $1,600,000)/Quantity where x is the amount of newspapers so

    P=($.35(800,000) + 1,600,000)/800,000

    OR you could simply MC + AFC = P so $.35 + $2 = $2.35 a paper to break even.

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