Chapter 7

Joe quits his computer programming​ job, where he was earning a salary of ​$70,000 per​ year, to start his own computer software business in a building that he owns and was previously renting out for ​$24,000 per year. In his first year of business he has the following​ expenses: salary paid to​ himself, ​$42,500​; ​rent, $0; and other​ expenses, ​$35,000. Find the accounting cost and the economic cost associated with​ Joe's computer software business. 1. The accounting cost of​ Joe's business is __ 2. The economic cost of​ Joe's business is __ (Enter your responses as integers.​)

1. $77500 2. $129000

Suppose that a paving company produces paved parking spaces​ (q) using a fixed quantity of land​ (T) and variable quantities of cement​ (C) and labor​ (L). The firm is currently paving​ 1,000 parking spaces. The​ firm's cost of cement is ​$30.00 per acre covered​ (c) and its cost of labor is ​$16.00​/hour ​(w). For the quantities of C and L that the firm has​ chosen, MPC=60 and MPL=4. 1. Is this firm minimizing its cost of producing parking​ spaces? 2. Does the firm need to alter its choices of C and L to decrease​ cost?

1. No since MPL/w does not equal MPC/c. 2. Yes, they need to increase C which would cause MPL to increase and MPC to decrease.

What is the difference between economies of scale and returns to​ scale?

Economies of scale define how cost changes with​ output, and returns to scale define how output changes with input usage.

Assume that the marginal cost​ (MC) of production is decreasing. Can you determine whether the average variable cost​ (AVC) is increasing or​ decreasing? Explain.

Regardless of whether MC is decreasing​, AVC could be increasing or decreasing depending on whether MC is greater than or less than AVC.

An isocost line shows

all the input combinations that can be purchased at a given total cost.

If a firm enjoys economies of scale up to a certain output​ level, and cost then increases proportionally with​ output, what can you say about the shape of the​ long-run average cost​ curve? The​ long-run average cost curve

decreases initially and then is horizontal.

There is no direct relationship between economies of scale and economies of scope because

economies of scale pertain to one output and economies of scope pertain to more than one output.

Firm 1 produces product A​ only, and firm 2 produces product B only. Firm 3 produces the same amount of A as firm 1 AND the same amount of B as firm 2. All three firms use​ state-of-the-art production​ techniques, but firm​ 3's total costs are less than the sum of the other two​ firms' total costs. We can conclude that there are

economies of scope in producing products A and B.

Isocost lines are straight because the slope of such lines​ ___________________.

equals the ratio of input​ prices, and this ratio is fixed

[T/F] If a firm hires a currently unemployed​ worker, the opportunity cost of utilizing the​ worker's services is zero. This statement is

false because the​ worker's time otherwise spent in unpaid household work has value.

A firm pays its accountant an annual retainer of ​$25,000. Is this an economic​ cost? The annual retainer

is an economic cost because it is an explicit cost.

Suppose that labor is the only variable input to the production process. If the marginal cost of production is increasing as more units of output are​ produced, what can you say about the marginal product of​ labor? If the marginal cost of production is increasing as more units of output are​ produced, then the marginal product of labor

is diminishing.

Suppose a chair manufacturer finds that the marginal rate of technical substitution​ (MRTS) of capital for labor in her production process is substantially greater than the ratio of the wage rate for​ assembly-line labor​ (w) to the rental rate on machinery​ (r). How should she alter her use of labor and capital to minimize the cost of​ production? Holding output​ constant, the chair manufacturer should use [less/more] labor and [less/more] capital.

more ; less

Jose rents office space for​ $20,000 per year. He uses the office to fill out tax returns for​ 1,000 clients per year. If the office rent increases to​ $25,000 per​ year, the marginal cost of filling out tax returns will

not change.

How does a change in the price of one input change the​ firm's long-run expansion​ path? If the price of an input​ changes, then the

slope of the isocost lines will​ change, and the firm will substitute away from the relatively more expensive input​, pivoting the expansion path toward the axis of the relatively cheaper input.

When the cost minimizing combination of inputs is being used and there is no corner​ solution,

the isoquant line is tangent to the isocost line.

[T/F] If the owner of a business pays himself no​ salary, then the accounting cost is​ zero, but the economic cost is positive. This statement is

true because economic costs include opportunity costs such as the value of the business​ owner's time.

[T/F] A firm that has positive accounting profit does not necessarily have positive economic profit. This statement is

true because economic costs will be greater than accounting costs if implicit costs exist.

A firm uses 80 hours of labor and 6 units of capital to produce​ 10,000 gadgets per day.​ Labor's marginal product is 4 gadgets per hour and the marginal product of capital is 20 gadgets per unit. Each unit of labor costs​ $8 per hour and each unit of capital costs​ $50 per unit. If the firm wants to continue producing​ 10,000 gadgets per day at the lowest possible​ cost, it should

use more labor and less capital.

Is the​ firm's expansion path always a straight​ line? A​ firm's expansion path

will not be a straight line if the ratio of inputs used changes with output.

Fred quits his job with a big accounting​ firm, where he was earning $90,000 per​ year, to start his own accounting business in a building he owns. He previously rented the building to someone who paid him rent of $28,000 per​ year, but now Fred collects no rent because he is using the building himself. Fred pays himself a salary of $35,000 per year and has other expenses of $27,000 per year. The yearly economic cost for​ Fred's accounting business is ___. (Enter your response as an​ integer.)

​$145000

Distinguish between economies of scale and economies of scope. Why can one be present without the​ other? Economies of scale occur when

​output can be doubled for less than a doubling of cost; however, economies of scope occur when joint output is less costly than the sum of the costs of producing multiple outputs separately.