EC201 Ch.7

At 1,000 units of output, the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. The variable cost of producing 1,000 units of output per week is equal to _____.

$28,500 - $12,500 = $16,000

At 1,000 units of output the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. If labor is the only variable input and the weekly wage is $1,600, how much labor is being used produce 1,000 units of output?

$28,500 - $12,500 = $16,000; $16,000/$1,600 = 10

Alicia is currently spending $6,000 per week on total variable costs to produce 500 hats. To produce 505 hats per week she would have to spend $6,100 per week. The marginal cost per hat is ______.

($6,100 - $6,000)/(505-500) = $100/5 = $20

What is the average score if the third student has an SAT score equal to 1000?

(1,300 + 1,300 + 1,000) / 3 = 1,200

Consider two students, each earning 1300 on the quantitative and verbal portions of the SAT. The average SAT score for our group of two is 1300, of course. (1300 + 1300)/2. Suppose we add one more student to the group and calculate the new average. What will the new average be if the third student has an SAT that is equal to 1300?

(1,300 + 1,300 + 1,300) / 3 = 1,300

What is the average score if the third student has an SAT score equal to 1600?

(1,300 + 1,300 + 1,600) / 3 = 1400

The production of 12,000 candy bars per day requires 60 workers. The average product of each worker is ______________ candy bars per day.

12,000/ 60 = 200

Marcus has four employees. The four employees produce 55 floral arrangements in a day. Marcus hires a fifth employee. The five employees produce 60 floral arrangements in a day. The fifth employee's marginal product is __________.

5 floral arrangements in a day

Production function

A function showing the maximum output for each specific combination of inputs, given technology.

Technological change

A shift in the production function, usually in the direction of a greater quantity of output at each level of input. Technological change may be the result of creation of new products, redesign of old products, or the creation of new methods of manufacturing.

Short run

A time period in which at least one input cannot be changed.

Long run

A time period long enough that all inputs can be changed.

What does diminishing marginal productivity mean?

As you increase the amount of a variable input, its marginal product eventually gets smaller.

The slope of a firm's production function will ______ as the amount of a variable input used increases if the input experiences diminishing marginal productivity.

Decrease

Diminishing marginal returns means that marginal product will eventually ______ and marginal cost will eventually _______.

Decrease; decrease

What are two of the reasons that average cost tends to have a "bowl" shape?

Fixed costs tend to dominate low levels of output and variable costs tend to dominate high levels of output

Total variable costs

For a given level of output, the costs (prices multiplied by the amounts of inputs) of the inputs that can be changed. These costs vary as output changes.

Assume that wages are $20 per hour; at the current number of hours of labor employed, the marginal product of an hour of labor is 10 units of output. Labor is the only variable input. What will happen to marginal cost if you hire one more hour of labor and the marginal product of the next hour of labor employed increases to 15 units of output?

If an hour of labor produces 10 more units of output in an hour and that hour of labor costs $20, the marginal cost is (1 hour x $20) / 10 units of output. That is equal to a marginal cost of $2 per unit. If the next hour of labor's marginal product increases to 15 units per hour, the marginal cost will fall to $1.33 per unit. (1 hour x $20) / 15 units of output = $1.33 per additional unit of output.

If the quantity of an input is variable in the short run, its total cost will ______________ as output increases.

Increase

An increase in technology will cause the total product function to ______________ and average costs to ______________.

Increase; decrease

In the short run, an increase in wages (the price of the variable input) will cause average cost to ______________ and marginal cost to ______________.

Increase; increase

Is it possible for marginal cost to be falling and average cost to be rising?

No, As long as marginal cost is greater than average cost, average cost will be rising.

Currently, the marginal product of labor is 45 units per week. The average product of labor at the current level of output is 32 units per week. If the employer hires one more worker, the marginal product of labor will be 47 units per week. The average product of labor will ______________.

Rise

Marginal cost

The change in total costs that results from increasing total product by one unit (ΔTC/ΔQ).

Total fixed costs

The costs (prices multiplied by the amounts of inputs) of the inputs that are fixed. This is also the amount of cost when total product is zero. Total fixed costs are costs that do not vary as output changes.

Marginal product

The increase in output from using one more unit of an input while all other inputs are constant (ΔTP/ΔL).

Law of diminishing marginal returns

The marginal product of an input will eventually decrease as more of that input is used. The law of diminishing marginal returns assumes that all other inputs remain constant.

A production function can best be described as which of the following?

The relationship between the quantity of inputs and quantity of outputs produced in a given amount of time.

Factors of production

The resources used to produce goods and services, often divided into three categories: labor, all the physical and mental inputs of people; capital, the machines, tools, buildings, and inventories; and land, the actual land used, including raw materials from land.

Total cost

The sum of total fixed cost and total variable cost.

Total product

The total amount of output produced.

Average product:

The total product divided by the number of units of a particular input used.

If a fixed cost does not change as output changes, why do you still have to pay it if you produce zero output?

There are some inputs that you must commit to just to get into the market. For example, you may need factory space. You will have to sign a lease or a loan agreement to get access to the space. The owner of the space or the bank that lends you the money does not care how much you produce. They must get paid every month no matter what. You may have to pay out of your own resources if you produce nothing.

Average cost

Total cost divided by the total product.