A Producer in Philadelphia Uses "Zone Pricing

question 248

Multiple Choice

A producer in Philadelphia uses "zone pricing." It's selling widgets for $150/ton in the Eastern Zone-which includes Richmond and Baltimore. The actual freight cost from its plant to Baltimore is $70/ton and from its plant to Richmond is $80/ton. In this situation:

• A) one ton of widgets costs a Baltimore buyer the same as a Richmond buyer.
• B) both buyers would pay $300 for one ton of widgets.
• C) one ton of widgets delivered to Richmond would cost the buyer $230.
• D) one ton of widgets delivered to Baltimore would cost the buyer $220.
• E) None of these alternatives is correct.

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Definitions:

AFC

Average Fixed Cost; the total fixed costs of production divided by the quantity of output produced, illustrating how fixed costs spread out over produced units.

Short Run

A period in which at least one input in the production process is fixed, limiting the ability to change production levels significantly.

Total Cost

The sum of fixed and variable costs incurred by a business in producing a certain level of output.

Short-Run Average Total Cost

Short-run average total cost is the total cost of production (fixed and variable costs) divided by the total output produced, calculated when at least one factor of production is fixed.