CHAPTER 7
1.1 The Total revenue is $300,000 ($15 x 20,000). The opportunity cost of the capital is 7% of
1.2 They are not earning economic profits; they are not considering opportunity costs. The
1.3 The size of the planetarium is the fixed factor. Decisions include what to charge for admission
1.4 Disagree. A firm earning zero economic profit is actually earning a “normal rate of return” or
1.5 (a) The opportunity cost of capital is the interest that could have been earned in another
1.6 The article states that the cost of producing this iPad Air 2 model is $358. Not included in this
1.7 Items c, d, and e represent short-run decisions. Items a, b, and f represent long-run decisions.
1.8 Economic cost is equal to all costs of production, including opportunity costs:
2.1 (a) The marginal product decreases as a single variable factor increases, holding all other factors
constant.
(b) The table does exhibit diminishing returns because the marginal product of labor falls as labor
increases:
Labor Total Output
Marginal
Product
0 0 —
2.2 (a)
2.3 $8 per hour. The skilled labor technique produces a sweater at a cost of ($50 + $25 + $10)/5 =
2.4 The addition of capital (tractors, combines, etc.) and the application of technology (nitrous
2.5 (a)
Number of
Workers
Number of
Oil Changes mplapl
0 0 — —
1 6 6 6.00
(b) Between 1 and 4 workers, there are increasing returns to labor. (MPL increases as more
(c) Marginal product is greater-than-average product for the second, third, fourth, and fifth
(d) Marginal product is less-than-average product for the sixth,, seventh, eighth, and ninth
2.6
2.7 (a) False: Total product reaches its highest level when marginal product is equal to zero. If it falls
(d) True: when ever marginal is above average, average rises and whenever marginal is below
(e) False: When marginal product is equal to average product, average of product is at a
2.8 (a) If Firm A cuts back on labor, its marginal product of labor will fall. If Firm B and Firm C cut
(b) If Firm A adds to its labor force, its marginal product of labor will increase only if it
3.1 (a) Total costs of each technique are as follows:
Q = 1 Q = 2 Q = 3 Q = 4 Q = 5
Technique B is cheaper at all levels of output.
(b)
Q L K
(c)
(d) With the price of labor falling to $2:
Q = 1 Q = 2 Q = 3 Q = 4 Q = 5
Technique B is still cheaper at all levels of output.
Q L K
1 3 1
5
3.2 Clearly, the labor-intensive way would be to carry the boxes down the hall and up the stairs one at
a time. She could get a friend or two to help. If the dorm has an elevator and she can borrow a
3.3 If Darius drives 70 mph, he will use 17.5 gallons of gas to drive the 420 miles (420 miles / 24
mpg = 17.5 gallons). 17.5 gallons x $4 per gallon = $70. If he drives 60 mph, he will use 14
3.4 (a) Tall buildings—skyscrapers.
3.5 (a) The first step is to calculate the cost for each level of output using each of the three
technologies. With capital costing $150 per day, and labor costing $100 per day, the results
are as follows:
Daily Output Technology 1 technology 2 technology 3
100 1,200 1,100 1,050
(b) In a low wage country, where capital costs $150 per day and labor costs only $60 per day, the
cost figures are as follows:
Daily Output Technology 1 technology 2 technology 3
100 960 780 930
(c) If the firm moves from a low-wage to a high-wage country and continues to produce 100