Microeconomics : Production and Cost

Q1 Is the demand for light weight compressors downward sloping? ePGP 2017-18

A1 The only data that is available to find out the demand for the light weight compressors is the ‘Sales Forecast of Light Weight Compressor’. If we plot the data Quantity vs Price based on this forecast, we can see whether the demand is downward sloping. This will however be a graph for the ‘forecast of the demand’ rather than the ‘actual demand’ for which data is not available.

5,500 31

30

6,500 28

24

7,500 17

Price per unit ($)

Units per Week

6,000

7,000

8,000

10

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000

SALES PROJECTIONS (LIGHT WEIGHT COMPRESSOR)

0

0 5 10 15 20 25 30 35

As we can see from the above graph, demand for the Light Weight Compressor is downward sloping.

Q2 Classify the following costs as Fixed, Sunk, Variable and give a one line reason for doing so:

a. Direct Labor

b. Material

c. Other Direct Charges d. Depreciation

e. Other Mfg Overheads f. Sales

g. General and Administrative

A2

a. Direct Labor – It is a Variable cost. Since the Direct labor depends upon the number of units produced, hence it is a variable cost.

b. Material – It is a Variable cost. Material required depends upon the number of units produced. As the number of units produced increase, the material required to produce those units also increases. As the number of units produced decrease, the material required decreases.

c. Other Direct Charges – These include Power, Material handling. These are also Variable costs, as these costs also increase or decrease when the number of units produced increases or decreases.

d. Depreciation – It is a fixed cost. Depreciation of a machine does not depend upon the number of units produced but on useful life of the machine. As the time passes, the remaining useful life of the machine decreases. It is not a sunk cost because even if the machine’s