problem11S06key

problem11S06key - E303 Davis Spring 2006 Problem Set#11 1...

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E303 Davis, Spring 2006 Problem Set #11 1. Characterizing Cost Functions Analytically. Consider the Cost function TC = 100 +10Q + Q 2 a. What are the fixed costs for this relationship? What are Variable Costs? Fixed Costs: ____100 __________________________________ Variable Costs: _10Q + Q 2 ________________________________ b. What is the marginal cost function? Marginal Cost: ___10+2Q ___________________________________ c. Identify Expressions for Average Variable and Average Total Cost Average Variable Costs: __ 10+Q _________________________________ Average Total Costs: ____ 100/Q + 10 + Q ________________________________ d. Finally, identify the output levels where AVC and ATC are minimized. AVC min: ___0 ___________________________________ 100/Q + 10 + Q = 10 + 2Q 100/Q = Q ATC min: _Q = 10_________ ________________________ 2. Sunk Cost vs. Fixed Cost : Radio broadcaster CoolPlay Inc., paid $50,000 for an operating license last year, and the company is not meeting its advertising revenue expectations. Currently, they company is taking in $6,000 per month in revenues and has $5,000 per month in variable expenses. What difference does it make to CoolPlay if the license is transferable (e.g., resalable) or not? Under which condition would CoolPlay remain in the market longer (resalable or not resalable?) Difference ___If the license is nontransferable, it is a sunk costs.
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