Micro chapter 9

Fill in the blanks in the table below. The problem is a "puzzle" so the blanks are not necessarily filled in sequentially. (Hint: Determine the total fixed cost first.)

0: 0.00, 10.00 1: 19.76 2: 5.00 3: 27.90, 8.84 5: 7.99, 54.30

Which of the following statements is true?

Accounting profit equals revenue minus explicit costs.

Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the figure. What plant size will the firm choose in producing (a) 50, (b) 130, (c) 160, and (d) 250 units of output?

a. 50 units of output: 1 b. 130 units of output: 2 c. 160 units of output: 2 d. 250 units of output: 3

Indicate how each of the following would shift the (1) MC curve, (2) AVC curve, (3) AFC curve, and (4) ATC curve of a manufacturing firm. In each case specify the direction of the shift.

a. A reduction in business property taxes MC & AVC= No change AFC & ATC= shift down b. An increase in the nominal wages of production workers MC, AVC, ATC= shift up AFC= no change c. A decrease in the price of electricity MC, AVC, ATC= shift down AFC= no change d. An increase in insurance rates on plant and equipment MC & AVC= no change AFC & ATC = shift up e. An increase in transportation costs MC, AVC, ATC= shift up AFC= no change

True or False. The U shape of the long-run ATC curve is the result of diminishing returns.

false

Given the cost information below, answer the following questions.

a. When output is 1, total variable cost is $9.76 b. When output is 2, average fixed cost is $5 c. When output is 3, average variable cost is $9.3 d. When output is 4, average total cost is $11.58 e. When output is 5, marginal cost is $7.99

The explicit costs of going to college include

the cost of tuition and books, while implicit costs include forgone income

Which of the following costs can a firm control directly and immediately?

Marginal costs

Fill in the blanks in the table below. The problem is a "puzzle" so the blanks are not necessarily filled in sequentially.

20: 200 30: 9000 40: 700 50: 25000 60: 600, 1100

Why do economists classify normal profits as costs?

A normal profit is the amount required to ensure continued supply of the product

Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from pottery sales is $72,000.

Calculate the accounting profit and the economic profit for Gomez's pottery firm. Accounting profit = $35,000 Economic profit = $13,000

Which of the following statements is true regarding the costs associated with owning and operating an automobile?

Fixed costs include insurance, and variable costs include gasoline

Classify the following as fixed or variable costs:

Fuel - Variable costs Interest on company-issued bonds - Fixed costs Shipping charges - Variable costs Payments for raw materials - Variable costs Real estate taxes - Fixed costs Executive salaries - Fixed costs Insurance premiums - Fixed costs Wage payments - Variable costs Depreciation and obsolescence charges - Fixed costs Sales taxes - Variable costs Rental payments on leased office machinery - Fixed costs

Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup, and to do so she took time off from a job that paid her $20 per hour.

Linda's accounting profit is $300 Linda's economic profit is $-100

You are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs would you take into account in making your decision?

The variable costs of the trip, the opportunity cost of your time, and the need for transportation in Florida

You just bought a motorcycle for $8,000. You plan to ride the motorcycle for two years, and then sell it for $3,200. During this two-year period, you expect to ride the motorcycle 10,000 miles each year, and you expect the motorcycle to get 50 miles per gallon of gasoline. The annual cost of insurance is $960, registration costs are $80 (good for two years), and the price of gasoline is $2.50 per gallon. During this same two-year period, you will need to service your motorcycle five times, at $240 per service check, and obtain five oil changes. Each oil change costs $35. You will also need to replace your tires once during this two-year period, for a total cost of $400.

a. Calculate the total fixed cost, total variable cost, and cost per mile for the two-year period, and then complete the table below. TFC= $6800 TVC= $2775 CPM= $0.48 b. Suppose you want to lower the cost per mile. You should focus on: - fixed costs, because they represent a majority of the total costs

There are economies of scale in ranching, especially with regard to fencing land. Suppose that barbed-wire fencing costs $10,000 per mile to set up.

a. How much would it cost to fence a single property whose area is one square mile if that property also happens to be perfectly square, with sides that are each one mile long? - $40,000 b. How much would it cost to fence exactly four such properties, which together would contain four square miles of area? - $160,000 c. Now consider how much it would cost to fence in four square miles of ranch land if, instead, it comes as a single large square that is two miles long on each side. - $80,000 d. Which is more costly—fencing in the four, one-square-mile properties or the single four-square-mile property? - Four, one-square-mile properties

You are a newspaper publisher. You are in the middle of a one-year factory rental contract that requires you to pay $500,000 per month, and you have contractual salary obligations of $1 million per month that you can't get out of. You also have a marginal printing cost of $0.25 per paper as well as a marginal delivery cost of $0.10 per paper.

a. If sales fall by 20 percent from 1 million newspapers per month to 800,000 newspapers per month, what happens to the AFC per newspaper? - AFC per newspaper RISES from $1.50 to $1.88 b. What happens to the MC per newspaper? - MC per newspaper DOES NOT CHANGE c. What happens to the minimum amount that you must charge to break even? - It RISES from $1.85 to $2.23

Imagine you have some workers and some handheld computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he can inventory 100 items per hour. Two workers sharing a computer can together inventory 150 items per hour. Three workers sharing a computer can together inventory 160 items per hour. And four or more workers sharing a computer can together inventory fewer than 160 items per hour. Computers cost $100 each and you must pay each worker $25 per hour.

a. If you assign one worker per computer, what is the cost of inventorying a single item? -$1.25 b. What is the cost if you assign two workers per computer? -$1 What if you assign three? -$1.09 c. How many workers per computer should you assign if you wish to minimize the cost of inventorying a single item? - 2 workers

Which of the following are short-run adjustments, and which are long-run adjustments?

a. Wendy's builds a new restaurant: Long-run adjustment b. Harley-Davidson Corporation hires 200 more production workers: Short-run adjustment c. A farmer increases the amount of fertilizer used on his corn crop: Short-run adjustment d. An Alcoa aluminum plant adds a third shift of workers:Short-run adjustment

Suppose a firm is producing in the long run. When it produces 4,000 units of output, its total cost is $8,000. When it produces 4,200 units of output, its total cost is $8,200, and when it produces 4,400 units of output, its total cost is $8,800. This firm is experiencing __________ returns to scale.

increasing, then decreasing

Explicit costs are payments the firm makes for

inputs such as wages and salaries to employees, whereas implicit costs are nonexpenditure costs that occur through the use of self-owned resources such as forgone income.