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(c) If labor is the only variable input, the total labor cost and total variable cost are equal. Find the
average variable cost of the firm’s product. Enter these figures in the table.
(d) Describe the relationship between the marginal product of labor and the marginal cost of the firm’s
product.
Chapter 07 – Businesses and the Costs of Production
(e) Describe the relationship between the average product of labor and the average variable cost.
Quantity of labor employed
Total output Marginal product of labor Average product of labor Total variable cost
Marginal cost Average variable cost
0 0 — — — —
1 10 10 10.00 $_____ $_____ $_____
2 22 12 11.00 _____ _____ _____
3 36 14 12.00 _____ _____ _____
4 48 12 12.00 _____ _____ _____
5 58 10 11.60 _____ _____ _____
6 66 8 11.00 _____ _____ _____
7 72 6 10.28 _____ _____ _____
8 76 4 9.50 _____ _____ _____
9 78 2 8.66 _____ _____ _____
10 78 0 7.80 _____ _____ _____
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28. Assume a firm has fixed costs of $80 and variable costs as indicated in the table below. Complete the cost
table.
Total product Total variable cost
Total
cost
AFC
AVC
ATC
MC
0 $ 0 $ 80 — — — —
1 110 190 $_____ $_____ $_____ $_____
2 150 230 _____ _____ _____ _____
3 180 260 _____ _____ _____ _____
4 220 300 _____ _____ _____ _____
5 270 350 _____ _____ _____ _____
6 340 420 _____ _____ _____ _____
7 440 520 _____ _____ _____ _____
8 580 660 _____ _____ _____ _____
29. Complete the following short-run cost table using the information provided.
Total product
TFC
AFC
TVC
AVC
TC
MC
0 $_____ — $_____ — $_____ $_____
1 _____ $_____ _____ $12 _____ _____
2 _____ 12 _____ 10 _____ _____
3 _____ _____ _____ 12 _____ _____
4 _____ _____ _____ 14 _____ _____
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Chapter 07 – Businesses and the Costs of Production
30. In the table below you will find a schedule of a firm’s fixed cost and variable cost. Complete the table by
computing total cost, average fixed cost, average variable cost, average total cost, and marginal cost.
Total product Total fixed cost Total variable cost
Total cost Average fixed cost Average variable cost Average total
cost
Marginal cost
0 $100 $ 0 $_____ — — — —
1 100 100 _____ $_____ $_____ $_____ $_____
2 100 180 _____ _____ _____ _____ _____
3 100 240 _____ _____ _____ _____ _____
4 100 320 _____ _____ _____ _____ _____
5 100 440 _____ _____ _____ _____ _____
6 100 600 _____ _____ _____ _____ _____
7 100 800 _____ _____ _____ _____ _____
8 100 1040 _____ _____ _____ _____ _____
9 100 1340 _____ _____ _____ _____ _____
10 100 1800 _____ _____ _____ _____ _____
31. Complete the following short-run cost table using the information provided.
Q TC TFC TVC AVC ATC MC
0 $ 4 $_____ $_____ $_____ $_____ $_____
1 7 _____ _____ _____ _____ _____
2 9 _____ _____ _____ _____ _____
3 10 _____ _____ _____ _____ _____
4 11 _____ _____ _____ _____ _____
5 13 _____ _____ _____ _____ _____
6 17 _____ _____ _____ _____ _____
7 22 _____ _____ _____ _____ _____
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32. Answer the questions below on the basis of the diagram.
(a) How can you tell if these cost curves are for the short run or the long run?
(b) What does the graph indicate about:
(1) AVC at 6000 units of output?
(2) ATC at 6000 units of output?
(3) AFC at 6000 units of output?
(4) TVC at 6000 units of output?
(5) TFC at all levels of output?
(6) TC at 10,000 units of output?
(7) When diminishing returns set in?
33. Explain what happens to AFC, AVC, ATC, and MC curves in these two situations: (a) fixed cost increase;
(b) variable cost increase.
34. What effect would each of the following have on the short-run average and marginal costs of an auto
dealership: (a) auto mechanics receive a 10% wage increase; (b) property taxes decrease; (c) auto dealers
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35. Explain the circumstances under which a firm might encounter a rather extended range of output over
which long-run average costs are relatively constant.
36. The following are three short-run average total cost schedules for the only three possible plant sizes, 1, 2,
and 3. Find the long-run average cost schedule and show the result in the second table.
Size 1 Size 2 Size 3
Q ATC Q ATC Q ATC
10 $1.00 20 $ .95 40 $1.00
20 .90 30 .80 50 .87
30 .85 40 .76 60 .84
40 .88 50 .79 70 .80
50 .93 60 .83 80 .95
60 1.05 70 .90 90 1.05
Long Run
Q AC
10 $_____
__________
__________
__________
__________
__________
__________
__________
90 _____
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37. In the table below are data from a book company that prints and binds special-order books. The data show
various quantities that can be produced by the firm in an hour and the unit costs of each quantity.
(1)
Quantity of books (2)
Unit cost A of books (3)
Unit cost B of books
100 $70 $_____
200 60 _____
300 50 _____
400 40 _____
500 35 _____
600 30 _____
700 35 _____
800 45 _____
900 60 _____
1000 80 _____
(a) In the graph below, label the axes and plot the long-run average cost curve for this firm using the data
in columns 1 and 2 of the table above.
(b) The firm then decides to subcontract the binding work to another company that specializes in the
binding of books. As a consequence, the unit costs of the firm are decreased by $20 at each output
level. Fill in column 3 of the table, and then graph the new long-run average cost curve B for the firm
on the graph.
(c) What will be the minimum cost with unit cost A? With unit cost B?
(d) If the firm produces 400 books, what will be the cost with curve A? With curve B?
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38. Below are the short-run average-total-cost schedules for three plants of different size that a firm might
build to produce its product. Assume that these are the only possible sizes of plants that the firm might
build. What is the long-run average-cost schedule for the firm? Show it in the second table below.
Plant size X Plant size Y Plant size Z
Output ATC Output ATC Output ATC
5 $10 5 $13 5 $72
10 9 10 12 10 65
15 8 15 11 15 52
20 7 20 10 20 41
25 6 25 8 25 33
30 9 30 7 30 20
35 12 35 9 35 15
40 18 40 12 40 14
45 20 45 17 45 12
50 23 50 19 50 14
55 29 55 25 55 20
60 31 60 33 60 30
Output Average cost
5 $_____
10 _____
15 _____
20 _____
25 _____
30 _____
35 _____
40 _____
45 _____
50 _____
55 _____
60 _____
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For what output levels should the firm build plant X, plant Y, and plant Z?
39. How can diseconomies of scale occur at larger capacities?
40. What factors explain economies of scale?
41. What is minimum efficient scale? What insights would it give about the size of firms in an industry?
42. The values for the long-run ATC curves of three different firms are listed in the table below.
Quantity ATC 1 ATC 2 ATC 3
5 10 7 12
10 8 6 9
15 7 5 7
20 6 6 6
25 6 7 5
30 6 9 4
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35 7 13 6
40 8 17 9
(a) Which firm faces the lowest minimum ATC?
(b) Which firm has the greatest minimum efficient scale?
(c) Which firm has the smallest economies of scale?
43. Consider the diagram below. Curves 1–8 are the short-run curves that occur with different plant sizes.
Answer the next two questions.
(a) On the graph show the range of outputs for: (1) economies of scale; (2) diseconomies of scale:
Indicate (3) minimum efficient scale.
(b) In the long run, what plant size should the firm build if it wants to produce: (1) 6000 units; (2) 14,000
units?
[text: E pp. 153-157; MI pp. 153-157]
44. What effect does the increase of the price of corn have on the cost curves of a firm producing items like
corn-based cereal or tortillas?
45. What effect does the increase of the price of gasoline have on the cost curves of package delivery firms
such as Federal Express or United Parcel Service? How might the effects differ for a software firm such as
Symantec that uses the Internet?
46. What are some of the sources of cost savings for business start-ups in the U.S. economy such as Google,
Intel, Starbucks, and Microsoft?
Chapter 07 – Businesses and the Costs of Production
47. How would a Verson stamping machine help a firm achieve economies of scale?
48. Explain how the Internet has affected the average fixed cost of a daily print newspaper.
49. Why are there two plants run by one firm that produce large commercial aircraft and thousands of plants
run by hundreds of firms that produce ready-mix concrete? Explain in terms of economies of scale.
50. (Last Word) What is the economic meaning of the saying “Don’t cry over spilt milk” and its implications
for economic decision-making?
