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6) The average total cost curve is U-shaped. At the quantity of output where average total cost is
at its minimum, is the marginal cost curve above the average total cost curve, below the average
total cost curve, or intersecting the average total cost curve?
7) Which average cost curves are U-shaped?
8) What is the relationship between the marginal product of labor and the marginal cost?
9) Explain how new technologies, which increase productivity, affect the average variable cost,
average total cost, and marginal cost curves.
10) When the Rent-A-Limo Company negotiates its new labor contract it finds that the wages it
must pay drivers have increased. How does this wage hike affect the Rent-A-Limo Company's
average fixed cost, average variable cost, average total cost, and marginal cost?
11) The table above has the total product schedule for an imaginary good called a widget. Each
unit of labor costs $25 and the total cost of capital is $100.
a. Use this information to complete the table. In the table, TFC is the total fixed cost, TVC is the
total variable cost, TC is the total cost, AFC is the average fixed cost, AVC is the average
variable cost, ATC is the average total cost, and MC is the marginal cost.
b. Suppose that labor becomes twice as expensive (so that one unit of labor now costs $50) but
nothing else changes. Complete the above table with the new cost schedules. If you plotted the
cost curves, how would the increased wage rate affect the cost curves?
12) This month, the local widget factory produced 100 widgets. The total variable cost of
production was $500 and the average total cost of production was $8.
a. What is the total cost?
b. What is the total fixed cost?
c. What is the average fixed cost?
d. What is the average variable cost?
13) Acme produces rocket shoes for use by slow coyotes. Acme's total cost schedule is given in
the table below. Acme's total fixed cost is $12. Complete the table. (In the table, TFC is the total
fixed cost, TVC is the total variable cost, AFC is the average fixed cost, AVC is the average
variable cost, and ATC is the average total cost.)
14) Rufus runs a skunk-skinning service in West Virginia. He employs skinners at a wage rate of
$240 a week for each one. He leases the shack where his workers work for $200 per week. The
rent is fixed for the next two years. Last week his 10 employees managed to skin a total of 300
skunks.
a. What is the average product of labor for Rufus's company?
b. What is Rufus' total variable cost per week?
c. What is the average variable cost for Rufus's company?
d. If Rufus adds his brother Jethro to his staff, at a wage rate of $240 a week, and his company
can now skin 310 skunks per week, what is Rufus's new average variable cost?
15) The above table gives the total cost schedule for oil changes at the local Jiffy Lube.
a. What is Jiffy Lube's total fixed cost?
b. What is the total variable cost of 2 oil changes?
c. What is the average variable cost of 4 oil changes?
d. What is the average fixed cost of 2 oil changes?
e. What is the marginal cost of the 3rd oil change?
16) Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays
them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student
added 50 newspapers to total output. The cost of the capital the firm uses is fixed at $50 per shift.
a. Is the newspaper operating in the long run or short run? Why?
b. What is the average product of 5 students?
c. Calculate the total fixed, total variable, and total costs of folding and bagging 300
newspapers.
d. Calculate the average fixed, average variable, and average total costs of folding and bagging
300 newspapers.
e. What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth
student?
17) Draw an average total cost curve, an average variable cost, and a marginal cost curve all on
the same graph. Make sure to correctly label the axes. What relationship must exist between the
marginal cost curve and the average total cost and average variable cost curves?
13.10 Essay: Long-Run Cost
1) In the long run all costs are variable costs. Why?
2) Which curve shows the lowest average total cost at which it is possible to produce each output
when the firm has time to change both its labor force and plant size?
3) What is the long-run average cost curve? What are the three ranges of output and in what
order do they occur? Briefly define each of the three ranges.
4) Are the short-run average total cost curve and the long-run average cost both U-shaped for the
same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-shaped.
5) What are economies of scale? What is the main source of economies of scale?
6) Explain the difference between increasing marginal returns and economies of scale.
7) What are diseconomies of scale and why might they occur?
8) A firm increases both its plant and its labor force by the same percentage and its average total
costs remain unchanged. Is the firm experiencing increasing returns to scale, constant returns to
scale, or decreasing returns to scale?
9) Jones Production started business with a small scale plant. Fortunately for Smith, the owner of
Jones Production, the business grew rapidly. It doubled its plant scale and its labor force every
year for the next six years. The table below gives the total costs and the associated total products
for each year.
a. Complete the table by finding the average cost for each scale.
b. Over what range of total product (output) did Jones Production experience economies of
scale, constant returns to scale, and diseconomies of scale?
10) Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250
square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubled her
workers to 2, and grew 4,500 pounds of herbs. She sells her rare, organic herbs for $50 a pound.
She pays her a worker $25,000 a year and rents her land for $100 per square foot for a year.
These are her only costs.
a. What was Ayanna's total cost last year and this year?
b. What was Ayanna's average total cost last year and this year?
c. Did Ayanna experience economies or diseconomies of scale?
11) The above figure represents the average total cost curves of a wheat farmer.
a. Which average total cost curve has the lowest average total cost of producing 30,000 bushels
of wheat?
b. Over what range of output is the farmer experiencing economies of scale?
c. Over what range of output is the farmer experiencing diseconomies of scale?
d. Which average total cost curve has the lowest possible average cost of production?
e. Which average total cost curve represents the largest plant?
