The costs of production

3. The costs of producing steel have declined substantially from building a conven- tional hot-rolled steel mill down to the new minimill technology that requires only scrap metal, an electric furnace, and 300 workers rather than iron ore raw materials, enormous blast furnaces, rolling mills, reheating furnaces, and thou- sands of workers. What effect on the potential industry profitability would Por- ter’s Five Forces framework suggest this new technology had? Why? 5. Why invest capital in purely competitive industries with equilibrium margins that are razor thin and entrants that erode quasi profits? Suppose volume is not excep- tionally large, why then? 6. Assume that a firm in a perfectly competitive industry has the following total cost schedule: OUTPUT (UNITS) 10 15 20 25 30 35 40 TOTAL COST ($) $110 150 180 225 300 385 480 a. Calculate a marginal cost and an average cost schedule for the firm. If the prevailing market price is $17 per unit, how many units will be produced and sold? What are profits per unit? What are total profits? Is the industry in long-run equilibrium at this price? 7. Royersford Knitting Mills, Ltd., sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $10 each. Fixed costs amount to $60,000, and total variable costs equal $120,000. The production de- partment has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand with respect to prices is estimated at −2. a. Evaluate the impact of the proposal to cut prices on (i) total revenue, (ii) total cost, and (iii) total profits. b. If average variable costs are assumed to remain constant over a 10 percent in- crease in output, evaluate the effects of the proposed price cut on total profits. 8. The Poster Bed Company believes that its industry can best be classified as monopolistically competitive. An analysis of the demand for its canopy bed has resulted in the following estimated demand function for the bed: P = 1760 – 12Q The cost analysis department has estimated the total cost function for the poster bed as 132 TC= Q −15Q +5Q+24,000 a. Calculate the level of output that should be produced to maximize short-run profits. What price should be charged? Compute total profits at this price-output level. Compute the point price elasticity of demand at the profit-maximizing level of output. What level of fixed costs is the firm experiencing on its bed production? What is the impact of a $5,000 increase in the level of fixed costs on the price charged, output produced, and profit generated?

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