Textbook
Chapter Titles – ‘Production and Cost in the Firm’
Note: For extra credit complete problem P1 in the ‘Production and Cost in the Firm’ appendix.
HOMEWORK Unit EIGHT
Chapter ‘Production and Cost in the Firm’
Q1. Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not?
Economic profit = Accounting profits minus implicit costs (opportunity costs).
Q2. Determine whether each of the following is an explicit cost or an implicit cost:
a. Payments for labor purchased in the labor market.
b. A firm’s use of a warehouse that it owns and could rent to another firm.
c. Rent paid for the use of a warehouse not owned by the firm.
d. The wages that owners could earn if they did not work for themselves.
Q3. Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations:
a. A firm with total revenues of $150 million, explicit costs of $90 million, and implicit costs of $40 million.
b. A firm with total revenues of $125 million, explicit costs of $100 million, and implicit costs of $30 million.
c. A firm with total revenues of $100 million, explicit costs of $90 million, and implicit costs of $20 million.
d. A firm with total revenues of $250,000, explicit costs of $275,000, and implicit costs of $50,000.
Q4. Why is it reasonable to think of normal profit as a type of cost to the firm?
Q5. What distinguishes a firm’s short-run period from its long-run period?
Q6. As a farmer, you must decide how many times during the year you will plant a new crop. Also, you must decide how far apart to space the plants. Will diminishing returns be a factor in your decision making? If so, how will it affect your decisions?
Q7. What is the difference between fixed cost and variable cost? Does each type of cost affect short-run marginal cost? If yes, explain how each affects marginal cost. If no, explain why each does or does not affect marginal cost.
Q8. Explain why the marginal cost of production must increase if the marginal product of the variable resource is decreasing.
Q9. What effect would each of the following have on a firm’s short-run marginal cost curve and its total fixed cost curve?
a. An increase in the wage rate
b. A decrease in property taxes
c. A rise in the purchase price of new capital
d. A rise in energy prices
Q10. Identify each of the curves in the following graph.
Q11. Explain why the marginal cost curve must intersect the average total cost curve and the average variable cost curve at their minimum points. Why do the average total cost and average variable cost curves get closer to one another as output increase?
Q12. In Exhibit 7 in this chapter, the output level where average total cost is at a minimum is greater than the output level where average variable cost is at a minimum. Why?
Q13. What types of changes could shift the long-run average cost curve? How would these changes also affect the short-run average total cost curve?
Q14. Explain the shape of the long-run average cost curve. What does ‘minimum efficient scale’ mean?
P17. Complete the following table. At what point does diminishing marginal returns set in?
|
Units of the variable Resource |
Total Product |
Marginal Product |
|
0 |
0 |
0 |
|
1 |
10 |
10 |
|
2 |
22 |
12 |
|
3 |
31 |
9 |
|
4 |
35 |
4 |
|
5 |
34 |
-1 |
P18. Complete the following table, assuming that each unit of labor costs $75 per day.
|
Quantity of Labor per Day |
Output per Day |
Fixed Cost |
Variable Cost |
Total Cost |
Marginal Cost |
|
0 |
0 |
$300 |
$0 |
$300 |
$0 |
|
1 |
5 |
$300 |
$75 |
$375 |
$15 |
|
2 |
11 |
$300 |
$150 |
$450 |
$12.50 |
|
3 |
15 |
$300 |
$225 |
$525 |
$18.75 |
|
4 |
18 |
$300 |
$300 |
$600 |
$25 |
|
5 |
20 |
$300 |
$375 |
$675 |
$37.50 |
a. Graph the fixed cost, variable cost, and total cost curves for these data.
 |
b. What is the marginal product of going from two to three units of labor?
c. What is average total cost when output is 18 units per day?
![clip_image004[1]](https://media.coursepaper.com/2015/04/204140-00003.png "clip_image004[1]") |
P19. Complete the following table, where L is units of labor, Q is units of output, and MP is the marginal product of labor.
|
L |
Q |
MP |
VC |
TC |
MC |
ATC |
|
0 |
0 |
— |
$0 |
$12 |
— |
— |
|
1 |
6 |
6 |
$3 |
$15 |
$0.50 |
$2.50 |
|
2 |
15 |
9 |
$6 |
$18 |
$0.33 |
$1.20 |
|
3 |
21 |
6 |
$9 |
$21 |
$0.50 |
$1.00 |
|
4 |
24 |
3 |
$12 |
$24 |
$1.00 |
$1.00 |
|
5 |
26 |
2 |
$15 |
$27 |
$1.50 |
$1.04 |
a. At what level of labor input do the marginal returns to labor begin to diminish?
b. What is the average variable cost when Q = 24?
c. What is this firm’s fixed cost?
d. What is the wage rate per day?
P20. Assume that labor and capital are the only inputs used by a firm. Capital is fixed at 5 units, which cost $100 each. Workers can be hired for $200 each. Complete the following table to show average variable cost (AVC), average total cost (ATC), and marginal cost (MC).
|
Quantity of Labor |
Total Output |
AVC |
ATC |
MC |
|
0 |
0 |
— |
— |
0 |
|
1 |
100 |
$2.00 |
$7.00 |
$2.00 |
|
2 |
250 |
$1.60 |
$3.60 |
$1.33 |
|
3 |
350 |
$1.71 |
$3.14 |
$2.00 |
|
4 |
400 |
$2.00 |
$3.25 |
$4.00 |
|
5 |
425 |
$2.35 |
$3.53 |
$8.00 |
P21. Suppose the firm has only three possible scales of production as shown below:
a. Which scale of production is most efficient when Q= 65?
b. Which scale of production is most efficient when Q =75?
c. Trace out the long-run average cost curve on the diagram.
