Question

Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your marginal cost decreases by $6. There are no fixed costs, and the first unit costs you $76 to produce. Use the given information to fill in the marginal cost of each unit, as well as the total cost and average cost of each level of output. Quantity Marginal Cost Total Cost Average Cost (Units) ($) ($) ($/unit) 1 $76 $76 $76 2 $ $ $ 3 $ $ $ 4 $ $ $ 5 $ $ $ 6 $ $ $ Suppose you receive a request for proposal (RFP) on a project for two units. Your break-even price for two units is $ . Suppose that if you get the contract, you estimate that you can win another project for two more units. The break-even price for those next two units alone is $ .

Answer 1

Answer:

a) Learning Costs Curve:

Quantity       Marginal           Total Cost ($)             Average Cost (Units)

                      Cost ($)                                                   ($/unit)

      1                $76                        $76                        $76

      2               $70                        $146                       $73

      3               $64                        $210                       $70

      4               $58                        $268                      $67

      5               $52                       $320                      $64

      6               $46                       $366                      $61

b) For a request for proposal for two units,  the break-even price for the two units is $146 ($73 per unit).

c) For two more units, the break-even price for them alone is $122 ($268 - $146).  Each unit's break-even price will be $61 ($122/2).

Explanation:

a) A break-even price is a price that is equal to the total cost.  At break-even, there is no profit and there is no loss.  The total cost equals total revenue.

b) The learning cost curve shows how the "marginal cost decreases as a result of an increase in production by one unit."  This curve can be illustrated graphically to show how the marginal and average costs reduce as a result of the increase in the quantity produced.