# , to its new position, ATC 2

Size: px
Start display at page:

Transcription

1 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-171 Behind the Supply Curve: Inputs and Costs chapter: Changes in the prices of key commodities can have a significant impact on a company s bottom line. According to a September 27, 2007, article in the Wall Street Journal, Now, with oil, gas and electricity prices soaring, companies are beginning to realize that saving energy can translate into dramatically lower costs. Another Wall Street Journal article, dated September 9, 2007, states, Higher grain prices are taking an increasing financial toll. Energy is an input into virtually all types of production; corn is an input into the production of beef, chicken, high-fructose corn syrup, and ethanol (the gasoline substitute fuel). a. Explain how the cost of energy can be both a fixed cost and a variable cost for a company. b. Suppose energy is a fixed cost and energy prices rise. What happens to the company s average total cost curve What happens to its marginal cost curve Illustrate your answer with a diagram. c. Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol producer. d. When the cost of corn goes up, what happens to the average total cost curve of an ethanol producer What happens to its marginal cost curve Illustrate your answer with a diagram. 1. a. Energy required to keep a company operating regardless of how much output is produced represents a fixed cost, such as the energy costs of operating office buildings, factories, and stores that must be maintained independent of the amount of output produced. In addition, energy is a variable cost because producing more output almost always requires using more energy. b. When fixed costs increase, so will average total costs. The average total cost curve will shift upward. In panel (a) of the accompanying diagram, this is illustrated by the movement of the average total cost curve from its initial position, ATC 1, to its new position, ATC 2. The marginal cost curve is not affected if the variable costs do not change. So the marginal cost curve remains at its initial position, MC. Cost of unit (a) A Rise in the Price of Energy MC ATC2 ATC 1 Cost of unit (b) A Rise in the Price of Corn MC 2 MC 1 ATC2 ATC 1 Quantity Quantity S-171

2 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-172 S-172 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS c. Since corn is an input into the production of ethanol, producing a larger quantity of ethanol requires a larger quantity of corn, making corn a variable cost. d. When variable costs increase, so do average total costs and marginal costs. Both curves will shift upward. In panel (b) of the accompanying diagram, the movement of the average total cost curve is illustrated by the shift from its initial position, ATC 1 to its new position, ATC 2. The movement of the marginal cost curve is illustrated by the shift from its initial position, MC 1, to its new position, MC Marty s Frozen Yogurt is a small shop that sells cups of frozen yogurt in a university town. Marty owns three frozen-yogurt machines. His other inputs are refrigerators, frozen-yogurt mix, cups, sprinkle toppings, and, of course, workers. He estimates that his daily production function when he varies the number of workers employed (and at the same time, of course, yogurt mix, cups, and so on) is as shown in the accompanying table. a. What are the fixed inputs and variable inputs in the production of cups of frozen yogurt b. Draw the total product curve. Put the quantity of labor on the horizontal axis and the quantity of frozen yogurt on the vertical axis. c. What is the marginal product of the first worker The second worker The third worker Why does marginal product decline as the number of workers increases Quantity of labor (workers) Quantity of frozen yogurt (cups) a. The fixed inputs are those whose quantities do not change as the quantity of output changes: frozen-yogurt machines, refrigerators, and the shop. The variable inputs are those whose quantities do change as the quantity of output changes: frozen-yogurt mix, cups, sprinkle toppings, and workers. b. The accompanying diagram illustrates the total product curve. Quantity of frozen yogurt (cups) TP Quantity of labor (workers)

3 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-173 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS S-173 c. The marginal product, MPL, of the first worker is 110 cups. The MPL of the second worker is 90 cups. The MPL of the third worker is 70 cups. The MPL of labor declines as more and more workers are added due to the principle of diminishing returns to labor. Since the number of frozen-yogurt machines is fixed, as workers are added there are fewer and fewer machines for each worker to work with, making each additional worker less and less productive. 3. The production function for Marty s Frozen Yogurt is given in Problem 2. Marty pays each of his workers \$80 per day. The cost of his other variable inputs is \$0.50 per cup of yogurt. His fixed cost is \$100 per day. a. What is Marty s variable cost and total cost when he produces 110 cups of yogurt 200 cups Calculate variable and total cost for every level of output given in Problem 2. b. Draw Marty s variable cost curve. On the same diagram, draw his total cost curve. c. What is the marginal cost per cup for the first 110 cups of yogurt For the next 90 cups Calculate the marginal cost for all remaining levels of output. 3. a. Marty s variable cost, VC, is his wage cost (\$80 per worker per day) and his other input costs (\$0.50 per cup). His total cost, TC, is the sum of the variable cost and his fixed cost of \$100 per day. The answers are given in the accompanying table. Quantity of frozen Quantity yogurt of labor (cups) (workers) VC TC MC of cup 0 0 \$0 \$ = = = = = = \$ b. The accompanying diagram shows the variable cost and total cost curves. Cost \$ TC VC Quantity of frozen yogurt (cups) c. Marginal cost, MC, per cup of frozen yogurt is shown in the table in part a; it is the change in total cost divided by the change in quantity of output.

4 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-174 S-174 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS 4. The production function for Marty s Frozen Yogurt is given in Problem 2. The costs are given in Problem 3. a. For each of the given levels of output, calculate the average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC) per cup of frozen yogurt. b. On one diagram, draw the AFC, AVC, and ATC curves. c. What principle explains why the AFC declines as output increases What principle explains why the AVC increases as output increases Explain your answers. d. How many cups of frozen yogurt are produced when average total cost is minimized 4. a. The average fixed cost, average variable cost, and average total cost per cup of yogurt are given in the accompanying table. (Numbers are rounded.) Quantity of frozen yogurt (cups) VC TC AFC of cup AVC of cup ATC of cup 0 \$0 \$ \$0.91 \$1.23 \$ b. The accompanying diagram shows the AFC, AVC, and ATC curves. Cost of cup \$ ATC AVC AFC Quantity of frozen yogurt (cups) c. AFC declines as output increases due to the spreading effect. The fixed cost is spread over more and more units of output as output increases. AVC increases as output increases due to the diminishing returns effect. Due to diminishing returns to labor, it costs more to produce each additional unit of output. d. Average total cost is minimized when 270 cups of yogurt are produced. At lower quantities of output, the fall attributable to the spreading effect dominates changes in average total cost. At higher quantities of output, the rise attributable to the diminishing returns effect dominates changes in average total cost.

5 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-175 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS S The accompanying table shows a car manufacturer s total cost of producing cars. a. What is this manufacturer s fixed cost b. For each level of output, calculate the variable cost (VC). For each level of output except zero output, calculate the average variable cost (AVC), average total cost (ATC), and average fixed cost (AFC). What is the minimum-cost output c. For each level of output, calculate this manufacturer s marginal cost (MC). d. On one diagram, draw the manufacturer s AVC, ATC, and MC curves. Quantity of cars TC 0 \$500, , , , , , , , , , ,100, a. The manufacturer s fixed cost is \$500,000. Even when no output is produced, the manufacturer has a cost of \$500,000. b. The accompanying table shows VC, calculated as TC FC; AVC, calculated as VC/Q; ATC, calculated as TC/Q; and AFC, calculated as FC/Q. (Numbers are rounded.) The minimum-cost output is 8 cars, the level at which ATC is minimized. Quantity of cars TC MC of car VC AVC of car ATC of car AFC of car 0 \$500,000 \$0 \$40, ,000 40,000 \$40,000 \$540,000 \$500,000 20, ,000 60,000 30, , ,000 10, ,000 70,000 23, , ,667 20, ,000 90,000 22, , ,000 30, , ,000 24, , ,000 40, , ,000 26, ,000 83,333 60, , ,000 31, ,857 71,429 80, , ,000 37, ,000 62, , , ,000 46, ,222 55, , ,100, ,000 60, ,000 50,000 c. The table also shows MC, the additional cost per additional car produced. Notice that MC is below ATC for levels of output less than the minimum-cost output and above ATC for levels of output greater than the minimum-cost output.

6 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-176 S-176 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS d. The AVC, ATC, and MC curves are shown in the accompanying diagram. Cost of car \$600, , , , , ,000 MC ATC AVC Quantity of cars 6. Labor costs represent a large percentage of total costs for many firms. According to a September 1, 2007, Wall Street Journal article, U.S. labor costs were up 0.9% during the preceding three months and 0.8% over the three months preceding those. a. When labor costs increase, what happens to average total cost and marginal cost Consider a case in which labor costs are only variable costs and a case in which they are both variable and fixed costs. An increase in labor productivity means each worker can produce more output. Recent data on productivity show that labor productivity in the U.S. nonfarm business sector grew 2% for each of the years 2005, 2006, and Annual growth in labor productivity averaged 1.5% from the mid-1970s to mid-1990s, 2.6% in the past decade, and 4% for a couple of years in the early 2000s. b. When productivity growth is positive, what happens to the total product curve and the marginal product of labor curve Illustrate your answer with a diagram. c. When productivity growth is positive, what happens to the marginal cost curve and the average total cost curve Illustrate your answer with a diagram. d. If labor costs are rising over time on average, why would a company want to adopt equipment and methods that increase labor productivity 6. a. When labor costs are a variable cost but not a fixed cost, an increase in labor costs leads to an increase in both average total cost and marginal cost. When labor costs are a variable cost and a fixed cost, the result is the same: both the average total cost and the marginal cost increase. b. When productivity growth is positive, any given quantity of labor can produce more output, causing the total product curve to shift upward. Since each unit of labor can produce more output, the marginal product of labor will increase and the marginal product of labor curve will shift upward. In panel (a) of the accompanying diagram, the upward shift of the total product curve is illustrated by the

7 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-177 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS S-177 movement from its initial position, TP 1, to its new position, TP 2. In panel (b), the upward shift of the marginal product of labor curve is illustrated by the movement from its initial position, MPL 1, to its new position, MPL 2. Quantity (a) Total Product Curves TP 2 Marginal product of labor (b) Marginal Product Curves TP 1 MPL 2 MPL 1 Quantity of labor Quantity of labor c. When productivity growth is positive, the marginal cost curve and the average total cost curve will both shift downward, assuming labor costs have not changed. In the accompanying diagram, the movement of the average total cost curve is illustrated by the shift from its initial position, ATC 1, to its new position, ATC 2. The movement of the marginal cost curve is illustrated by the shift from its initial position, MC 1, to its new position, MC 2. Cost of unit MC 1 MC 2 ATC1 ATC 2 Quantity d. Rising labor costs will shift the average total cost and marginal cost curves upward. Productivity growth will counteract this, shifting the average total cost and marginal cost curves downward. 7. Magnificent Blooms is a florist specializing in floral arrangements for weddings, graduations, and other events. Magnificent Blooms has a fixed cost associated with space and equipment of \$100 per day. Each worker is paid \$50 per day. The daily production function for Magnificent Blooms is shown in the accompanying table. Quantity of labor (workers) Quantity of floral arrangements

8 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-178 S-178 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS a. Calculate the marginal product of each worker. What principle explains why the marginal product per worker declines as the number of workers employed increases b. Calculate the marginal cost of each level of output. What principle explains why the marginal cost per floral arrangement increases as the number of arrangements increases 7. a. MPL, shown in the accompanying table for the five workers, is the change in output resulting from the employment of one additional worker per day. MPL falls as the quantity of labor increases due to the principle of diminishing returns. Marginal product of labor Variable MPL = cost Marginal cost Quantity Quantity ΔQ/ΔL VC = of floral of labor of floral (floral number Total cost arrangement L arrangements arrangements of workers TC = MC = (workers) Q per worker) wage rate FC + VC ΔTC/ΔQ 0 0 \$0 \$100 5 \$10.00 (= 50/5) (= 50/4) (= 50/3) (= 50/2) (= 50/1) b. The marginal cost, MC, of floral arrangements is the change in total cost divided by the change in output. So, to compute MC, we first need to compute total cost, TC = FC + VC, as shown in the table. MC per floral arrangement is also shown in the table. MC increases as output increases due again to the principle of diminishing returns. 8. You have the information shown in the accompanying table about a firm s costs. Complete the missing data. Quantity TC MC ATC AVC \$20 \$

9 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S The accompanying table contains the complete cost data. The total cost of producing one unit of output is the total cost of producing zero units of output plus the marginal cost of increasing output from zero to one, and so forth. The average total cost is just the total cost divided by output. Since the total cost of producing zero output is \$20, the variable cost is TC \$20. The average variable cost is then just the variable cost divided by output. Quantity TC MC of unit ATC of unit AVC of unit 9. Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. a. A decreasing marginal product tells us that marginal cost must be rising. b. An increase in fixed cost increases the minimum-cost output. c. An increase in fixed cost increases marginal cost. d. When marginal cost is above average total cost, average total cost must be falling. CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS S \$20.00 \$ \$40.00 \$ a. True. If each additional unit of the input adds less to output than the previous unit (decreasing marginal product), then in order to produce additional output, the firm needs to use increasingly more of the input; that is, the marginal cost of production increases. b. True. As the fixed cost rises, the average fixed cost also rises; that is, the spreading effect is now larger. It is the spreading effect that causes average total cost to decline. Since this effect is now larger, it dominates the diminishing returns effect over a greater quantity of output; that is, average total cost decreases over a greater quantity of output. c. False. An increase in fixed cost does not change marginal cost. Marginal cost is the additional cost of producing an additional unit of output. Fixed cost does not change as output is increased, and so the additional cost of producing an additional unit of output is independent of the fixed cost. d. False. When marginal cost is above average total cost, average total cost must be rising. If the additional cost of producing one more unit of output is greater than what it costs to produce each unit of output on average, then producing that one more unit of output must increase the average total cost.

10 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-180 S-180 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS 10. Mark and Jeff operate a small company that produces souvenir footballs. Their fixed cost is \$2,000 per month. They can hire workers for \$1,000 per worker per month. Their monthly production function for footballs is as given in the accompanying table. a. For each quantity of labor, calculate average variable cost (AVC), average fixed cost (AFC), average total cost (ATC), and marginal cost (MC). b. On one diagram, draw the AVC, ATC, and MC curves. c. At what level of output is Mark and Jeff s average total cost minimized Quantity of labor (workers) Quantity of footballs , , , a. The AVC, AFC, ATC, TC, and MC are given in the accompanying table. Quantity of labor Quantity of AVC of AFC of ATC of TC of MC of (workers) footballs football football football footballs football 0 0 \$2, \$3.33 \$6.67 \$ , , , , , , , , \$ b. The accompanying diagram shows the AVC, ATC, and MC curves. Cost of football \$10 MC ATC AVC ,000 1,200 1,400 1,600 Quantity of footballs c. According to the table, Mark and Jeff s average total cost is minimized at 1,200 footballs per month, where the ATC is \$4.17.

13 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-183 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS S-183 c. Draw Don s long-run average total cost curve. Draw his short-run average total cost curve if he owns 3 trucks. 14. a. In the short run, producing 20 orders per week with 3 trucks, Don s average total cost per order will be (\$7,000 + \$1,800)/20 = \$440. If he instead produces 60 orders per week with three trucks, his average total cost per order will be \$297. b. The long-run average total cost of producing 20 orders per week is \$400 because Don would choose the number of trucks (2 trucks) that minimizes the total cost of producing 20 orders. His short-run average total cost is greater than the longrun minimum because, using 3 trucks, the level of the fixed input is greater than he needs to optimally produce 20 orders per week. c. The accompanying diagram shows Don s LRATC and ATC. Cost of order \$ ATC LRATC Quantity of orders 15. True or False Explain your reasoning. a. The short-run average total cost can never be less than the long-run average total cost. b. The short-run average variable cost can never be less than the long-run average total cost. c. In the long run, choosing a higher level of fixed cost shifts the long-run average total cost curve upward. 15. a. True. The long-run average total cost is the average total cost you get by choosing the most favorable level of fixed cost in the long run; that is, it is the lowest average total cost that is possible when you can adjust how much of the fixed input you use. In other words, the long-run average total cost of producing a certain level of output is the lowest average total cost with which that level of output can be produced. b. False. The long-run average total cost is the lowest average total cost possible. But average variable cost will always be less than average total cost (it is lower than the average total cost by just the amount of the average fixed cost). So short-run average variable cost can be lower than long-run average total cost. c. False. In the long run, choosing a higher level of fixed cost allows you to move along and to the right on the long-run average total cost curve. In the long run, if you want to produce a larger quantity of output, you would optimally increase the level of fixed cost (this will decrease the average variable cost). You will do this in such a way as to spend the lowest possible average total cost; that is, you will be on the long-run average total cost curve but farther to the right (at a larger quantity of output).

14 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-184 S-184 CHAPTER 12 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS 16. Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW s long-run average total cost. a. For which levels of output does WW experience increasing returns to scale b. For which levels of output does WW experience decreasing returns to scale c. For which levels of output does WW experience constant returns to scale Quantity of cars LRATC of car 1 \$30, , , , , , , , a. WW s long-run average total cost is decreasing over the range of output between 1 and 4 cars. So over that range, WW experiences increasing returns to scale. b. WW s long-run average total cost is increasing over the range of output between 6 and 8 cars. So over that range, WW experiences decreasing returns to scale. c. WW s long-run average total cost is constant over the range of output between 4 and 6 cars. So over that range, WW experiences constant returns to scale.

### chapter Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost

chapter 8 Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost We ve just seen how to derive a firm s total cost curve from its production function.

### Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Chapter 12 - Behind the Supply Curve - Inputs and Costs Fall 2010 Herriges (ISU) Ch. 12 Behind the Supply Curve Fall 2010 1 / 30 Outline 1 The Production Function

### Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions.

Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions. Reference: Gregory Mankiw s Principles of Microeconomics, 2 nd edition, Chapter 13. Long-Run

### Technology, Production, and Costs

Chapter 10 Technology, Production, and Costs 10.1 Technology: An Economic Definition 10.1 LEARNING OBJECTIVE Learning Objective 1 Define technology and give examples of technological change. A firm s technology

### a. What is the total revenue Joe can earn in a year? b. What are the explicit costs Joe incurs while producing ten boats?

Chapter 13 1. Joe runs a small boat factory. He can make ten boats per year and sell them for 25,000 each. It costs Joe 150,000 for the raw materials (fibreglass, wood, paint, and so on) to build the ten

### Chapter 7: The Costs of Production QUESTIONS FOR REVIEW

HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?

### Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review 1. Implicit costs are: A) equal to total fixed costs. B) comprised entirely of variable costs. C) "payments" for self-employed

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 9 Chapter 6 WRITE [4] Gomez runs a small pottery firm. He hires one helper at \$12,000 per year, pays annual rent of \$5,000 for his

### 11 PERFECT COMPETITION. Chapter. Competition

Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

### Review of Production and Cost Concepts

Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #3 Review of Production and Cost Concepts Thursday - September 23, 2004 OUTLINE OF TODAY S RECITATION 1.

### PART A: For each worker, determine that worker's marginal product of labor.

ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

### Unit 2.3 - Theory of the Firm Unit Overview

Unit 2.3.1 - Introduction to Market Structures and Cost Theory Intro to Market Structures Pure competition Monopolistic competition Oligopoly Monopoly Cost theory Types of costs: fixed costs, variable

### chapter: Solution Monopolistic Competition and Product Differentiation

S221-S230_Krugman2e_PS_Ch16.qxp 9/16/08 9:23 PM Page S-221 Monopolistic Competition and Product Differentiation chapter: 16 1. Use the three conditions for monopolistic competition discussed in the chapter

### Chapter 12. The Costs of Produc4on

Chapter 12 The Costs of Produc4on Copyright 214 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. What will you learn

### An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a

### 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007. Lecture 13. Cost Function

Short-Run Cost Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Cost Functions Outline. Chap : Short-Run Cost Function. Chap : ong-run Cost Function Cost Function et w be the

### Price Theory Lecture 4: Production & Cost

Price Theory Lecture 4: Production & Cost Now that we ve explained the demand side of the market, our goal is to develop a greater understanding of the supply side. Ultimately, we want to use a theory

### Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2

Factor Markets Problem 1 (APT 93, P2) Two goods, coffee and cream, are complements. Due to a natural disaster in Brazil that drastically reduces the supply of coffee in the world market the price of coffee

### SHORT-RUN PRODUCTION

TRUE OR FALSE STATEMENTS SHORT-RUN PRODUCTION 1. According to the law of diminishing returns, additional units of the labour input increase the total output at a constantly slower rate. 2. In the short-run

### Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:

Learning Objectives After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Discuss three characteristics of perfectly competitive

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

### Practice Questions Week 2 Day 1 Multiple Choice

Practice Questions Week 2 Day 1 Multiple Choice 1. When individuals come together to buy and sell goods and services, they form a(n) a. economy b. market c. production possibilities frontier d. supply

### Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015

Name: Solutions Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015 Spring 2015 Prof. Dowell Instructions: Write the answers clearly and concisely on these sheets

### The Cost of Production

The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

### Chapter 6 Competitive Markets

Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

### Cost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

WSG6 7/7/03 4:36 PM Page 79 6 Cost OVERVIEW The previous chapter reviewed the theoretical implications of the technological process whereby factors of production are efficiently transformed into goods

### CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY TEACHING NOTES This chapter begins by explaining what we mean by a competitive market and why it makes sense to assume that firms try to maximize profit.

### Figure: Computing Monopoly Profit

Name: Date: 1. Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restricted-input monopolies. D) sunk-cost monopolies. Use the following to answer

### Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit 1) Accountants include costs as part of a firm's costs, while economists include costs. A) explicit; no explicit B) implicit;

### Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

### Chapter 12 Production and Cost

Chapter 12 Production and Cost 12.1 Economic Cost and Profit 1) The primary goal of a business firm is to A) promote fairness. B) make a quality product. C) promote workforce job satisfaction. D) maximize

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Multiple choice review questions for Midterm 2 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A consumption point inside the budget line A) is

### CE2451 Engineering Economics & Cost Analysis. Objectives of this course

CE2451 Engineering Economics & Cost Analysis Dr. M. Selvakumar Associate Professor Department of Civil Engineering Sri Venkateswara College of Engineering Objectives of this course The main objective of

### Chapter. Perfect Competition CHAPTER IN PERSPECTIVE

Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.

### Law of Demand: Other things equal, price and the quantity demanded are inversely related.

SUPPLY AND DEMAND Law of Demand: Other things equal, price and the quantity demanded are inversely related. Every term is important -- 1. Other things equal means that other factors that affect demand

### N. Gregory Mankiw Principles of Economics. Chapter 13. THE COSTS OF PRODUCTION

N. Gregory Mankiw Principles of Economics Chapter 13. THE COSTS OF PRODUCTION Solutions to Problems and Applications 1. a. opportunity cost; b. average total cost; c. fixed cost; d. variable cost; e. total

### OVERVIEW. 5. The marginal cost is hook shaped. The shape is due to the law of diminishing returns.

9 COST OVERVIEW 1. Total fixed cost is the cost which does not vary with output. Total variable cost changes as output changes. Total cost is the sum of total fixed cost and total variable cost. 2. Explicit

### chapter: Solution Solution The Rational Consumer

S11-S156_Krugman2e_PS_Ch1.qxp 9/16/8 9:21 PM Page S-11 The Rational Consumer chapter: 1 1. For each of the following situations, decide whether Al has increasing, constant, or diminishing marginal utility.

### MATH MODULE 5. Total, Average, and Marginal Functions. 1. Discussion M5-1

MATH MODULE Total, Average, and Marginal Functions 1. Discussion A very important skill for economists is the ability to relate total, average, and marginal curves. Much of standard microeconomics involves

### MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.

MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.2011 TİIE 12:30 STUDENT NAME AND NUMBER MULTIPLE CHOICE. Choose the one

### Production and Cost Analysis

Production and Cost Analysis The entire production process begins with the supply of factors of production or inputs used towards the production of a final good we all consume in the final good market.

### Final Exam (Version 1) Answers

Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal

### Market Structure: Perfect Competition and Monopoly

WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of July 14 Chapter 11 WRITE: [2] Complete the following labour demand table for a firm that is hiring labour competitively and selling its

### Chapter 3 Productivity, Output, and Employment

Chapter 3 Productivity, Output, and Employment Multiple Choice Questions 1. A mathematical expression relating the amount of output produced to quantities of capital and labor utilized is the (a) real

### Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen

Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 5 Perfect Competition Chapter Objectives! In this chapter you will: " Consider the four market structures, and the main differences

### Answers to Text Questions and Problems in Chapter 11

Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation

### Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor

Agenda Productivity, Output, and Employment, Part 1 3-1 3-2 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.

### Demand, Supply and Elasticity

Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and

### Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

### Pre-Test Chapter 21 ed17

Pre-Test Chapter 21 ed17 Multiple Choice Questions 1. Which of the following is not a basic characteristic of pure competition? A. considerable nonprice competition B. no barriers to the entry or exodus

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Test 2 Review Econ 201, V. Tremblay MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Barbara left a \$25,000 job as an architect to run a catering

### Practice Questions Week 6 Day 1

Practice Questions Week 6 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Economists assume that the goal of the firm is to a. maximize total revenue

### CHAPTER 8 COSTS OF PRODUCTION

CHAPTER 8 COSTS OF PRODUCTION Chapter in a Nutshell This chapter gives an in-depth look at the costs of production for firms, both in the short run and in the long run. Although production techniques may

### Microeconomics Topic 7: Contrast market outcomes under monopoly and competition.

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Reference: N. Gregory Mankiw s rinciples of Microeconomics, 2 nd edition, Chapter 14 (p. 291-314) and Chapter 15 (p. 315-347).

### LECTURE NOTES ON MACROECONOMIC PRINCIPLES

LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College peter.ireland@bc.edu http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution

### Supply and Demand. A market is a group of buyers and sellers of a particular good or service.

Supply and Demand A market is a group of buyers and sellers of a particular good or service. The definition of the good is a matter of judgement: Should different locations entail different goods (and

### Pre-Test Chapter 20 ed17

Pre-Test Chapter 20 ed17 Multiple Choice Questions 1. In the above diagram it is assumed that: A. some costs are fixed and other costs are variable. B. all costs are variable. C. the law of diminishing

### CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of \$0 per unit and sets a price to maximize

### CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

### Chapter 6: Break-Even & CVP Analysis

HOSP 1107 (Business Math) Learning Centre Chapter 6: Break-Even & CVP Analysis One of the main concerns in running a business is achieving a desired level of profitability. Cost-volume profit analysis

### BPE_MIC1 Microeconomics 1 Fall Semester 2011

Masaryk University - Brno Department of Economics Faculty of Economics and Administration BPE_MIC1 Microeconomics 1 Fall Semester 2011 Final Exam - 05.12.2011, 9:00-10:30 a.m. Test A Guidelines and Rules:

### Lecture 8 Practice. Multiple Choice Identify the choice that best completes the statement or answers the question.

Lecture 8 Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which field of economics studies how the number of firms affects the prices in a market

### Economics 10: Problem Set 3 (With Answers)

Economics 1: Problem Set 3 (With Answers) 1. Assume you own a bookstore that has the following cost and revenue information for last year: - gross revenue from sales \$1, - cost of inventory 4, - wages

### Chapter 8. Competitive Firms and Markets

Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,

### PPF. Microeconomics: Scarcity, Opportunity Cost & PPF

Muffins HOSP 2207 (Economics) Learning Centre Microeconomics: Scarcity, Opportunity Cost & PPF Economics is the study of how we allocate scarce resources. The problem with the world is that there will

### How To Calculate Profit Maximization In A Competitive Dairy Firm

Microeconomic FRQ s 2005 1. Bestmilk, a typical profit-maximizing dairy firm, is operating in a constant-cost, perfectly competitive industry that is in long-run equilibrium. a. Draw correctly-labeled

### Chapter 6 Economic Growth

Chapter 6 Economic Growth 1 The Basics of Economic Growth 1) The best definition for economic growth is A) a sustained expansion of production possibilities measured as the increase in real GDP over a

### Pre-Test Chapter 15 ed17

Pre-Test Chapter 15 ed17 Multiple Choice Questions 1. The extended AD-AS model: A. distinguishes between short-run and long-run aggregate demand. B. explains inflation but not recession. C. includes G

### Employment and Pricing of Inputs

Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level

### 3. George W. Bush is the current U.S. President. This is an example of a: A. Normative statement B. Positive statement

Econ 3144 Fall 2006 Test 1 Dr. Rupp Name Sign Pledge I have neither given nor received aid on this exam Multiple Choice Questions (3 points each) 1. What you give up to obtain an item is called your A.

### Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics

roblem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics 1) Explain the differences between demand-pull inflation and cost-push inflation. Demand-pull inflation results

### Pre-Test Chapter 25 ed17

Pre-Test Chapter 25 ed17 Multiple Choice Questions 1. Refer to the above graph. An increase in the quantity of labor demanded (as distinct from an increase in demand) is shown by the: A. shift from labor

### CH 10 - REVIEW QUESTIONS

CH 10 - REVIEW QUESTIONS 1. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the

### Economics 201 Fall 2010 Introduction to Economic Analysis

Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #5 Solutions Instructions: This problem set is due in class on Wednesday, October 13. If you get stuck, you are encouraged

### At the end of Chapter 18, you should be able to answer the following:

1 How to Study for Chapter 18 Pure Monopoly Chapter 18 considers the opposite of perfect competition --- pure monopoly. 1. Begin by looking over the Objectives listed below. This will tell you the main

### Fixed Cost. Marginal Cost. Fixed Cost. Marginal Cost

1. Complete the following table (round each answer to the nearest whole number): Output Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed 0 30 1 35 60 3 110 4 00 5 30 6 600 Output Total Variable

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

Principles of Microeconomics, Quiz #5 Fall 2007 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) Perfect competition

### chapter >> Making Decisions Section 2: Making How Much Decisions: The Role of Marginal Analysis

chapter 7 >> Making Decisions Section : Making How Much Decisions: The Role of Marginal Analysis As the story of the two wars at the beginning of this chapter demonstrated, there are two types of decisions:

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Economics 103 Spring 2012: Multiple choice review questions for final exam. Exam will cover chapters on perfect competition, monopoly, monopolistic competition and oligopoly up to the Nash equilibrium

### Marginal cost. Average cost. Marginal revenue 10 20 40

Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

### Experiment 8: Entry and Equilibrium Dynamics

Experiment 8: Entry and Equilibrium Dynamics Everyone is a demander of a meal. There are approximately equal numbers of values at 24, 18, 12 and 8. These will change, due to a random development, after

### COST THEORY. I What costs matter? A Opportunity Costs

COST THEORY Cost theory is related to production theory, they are often used together. However, the question is how much to produce, as opposed to which inputs to use. That is, assume that we use production

### Microeconomics and mathematics (with answers) 5 Cost, revenue and profit

Microeconomics and mathematics (with answers) 5 Cost, revenue and profit Remarks: = uantity Costs TC = Total cost (= AC * ) AC = Average cost (= TC ) MC = Marginal cost [= (TC)'] FC = Fixed cost VC = (Total)

### 13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Key Concepts

Chapter 3 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded.

### Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory

Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is \$200 per

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

### Chapter 12. Aggregate Expenditure and Output in the Short Run

Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)

### Econ 201 Lecture 17. The marginal benefit of expanding output by one unit is the market price. Marginal cost of producing corn

Econ 201 Lecture 17 The Perfectly Competitive Firm Is a Taker (Recap) The perfectly competitive firm has no influence over the market price. It can sell as many units as it wishes at that price. Typically,

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640, Survey of Microeconomics, Quiz #4 Fall 2006 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the short run, A) there are no variable

### Suppose you are a seller with cost 13 who must pay a sales tax of 15. What is the lowest price you can sell at and not lose money?

Experiment 3 Suppose that sellers pay a tax of 15. If a seller with cost 5 sells to a buyer with value 45 at a price of 25, the seller earns a profit of and the buyer earns a profit of. Suppose you are

### chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve

chapter 9 The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole. Perfect Competition and the >> Supply Curve Section 3: The Industry

ANSWERS TO END-OF-CHAPTER QUESTIONS 23-1 Briefly indicate the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications