Eco 690 Homework 3

ECO 690 Homework 3

1. Chapter 12 Problem 15 

Chevy Volt Production Temporarily Shut Down

1. Explain how the shutdown decision will affect GM Chevy Volt’s TFC, TVC, AND TC:

1. Total Fixed Cost will not be affected because this is a sunk cost.
2. Total Variable Cost will decrease because because workers will not be working and this affects wages.
3. Total Cost will decrease because the TVC is decreasing. (TFC+TVC=TC)

1. Under what conditions would this shutdown decision maximize Chevy Volt’s economic profit (or minimize its loss)? Explain.

This shutdown decision will help to minimize its loss. The revenue received from the sale of the Chevy Volts produced did not cover the variable costs of production. By not producing anymore electric cars for five weeks, their total costs will go down.

1. Under what conditions will GM start production the Chevy Volt again? Explain.

If the market conditions improve, due to prices increasing, production costs falling, or demand for the electric car rising, then the firm can resume production.

1. Chapter 13 Problem 12

Hot Air’s TR & MR schedules

Problem 13: Graph of Market Demand Curve and Marginal Revenue Curve

[pic 1]

Problem 14: Hot Air’s Profit-Maximizing Output & Price. Calculate the Economic Profit.

Problem 15: If the government imposes a tax on Hot Air’s profit, how do its output and price change? As a result of the tax, Hot Air’s fixed cost changes, but the marginal cost does not change. The tax also decreases Hot Air’s economic profit but does not change its output or price.