Question

Ted has been a fisherman all of his life. Ted realizes the risk he takes as a business whose market structure is a perfectly competitive market. Ted is analyzing whether he should stay in business. He is fortunate that all of his nets, fishing gear are all paid for but Ted still has other fixed and variable costs that he incurs as a part of doing business.

Help Ted analyze his cost information and serve as his business consultant.

Here is some cost information that Ted has given you:

Fixed Costs are $50,000 per year. Insurance, dock space, and rental of fish processing equipment.

Answer 1

Ted's fixed costs are $50,000 per year and include insurance, dock space, and rental of fish processing equipment. He should ignore these costs when making decisions about future production or pricing. Ted should focus on analyzing his variable costs, which will help him assess the potential profitability of staying in business.

Step-by-step explanation:

In analyzing Ted's cost information, we can classify his costs into fixed costs and variable costs. Fixed costs are costs that remain constant regardless of the level of production, such as insurance, dock space, and rental of fish processing equipment. In Ted's case, the fixed costs amount to $50,000 per year. These costs are considered sunk costs and should be ignored when making decisions about future production or pricing.

On the other hand, variable costs are costs that vary with the level of production. For a fisherman like Ted, this may include costs such as fuel, bait, and maintenance. By analyzing his variable costs, Ted can determine the extent to which costs will increase if production rises and assess the potential profitability of staying in business.