ECON FINAL

An increase in fixed cost increases marginal cost.

False; fixed costs do not change with increases in output, so the change in total cost resulting from an increase in production will remain unchanged. Changes in fixed cost do not affect marginal cost.

The short-run average variable cost can never be less than the long-run average total cost.

False; short-run average variable costs do not include fixed costs, so short-run average variable cost may be lower than long-run average total cost for high levels of fixed cost.

When marginal cost is above average total cost, average total cost must be falling.

False; when marginal cost is above average total cost, then producing the next unit of output will be more costly than the average, increasing average total cost.

Each graph illustrates three short-run cost curves for firms, where ATC is average total cost (also referred to as average cost), MC is marginal cost, and AVC is average variable cost.

graph in link: https://docs.google.com/document/d/1T96Tm3Y3NCOMsv0D_r8MXSVQ_k9V6IZU8tIcmMt1c2E/edit

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.)

image in link: https://docs.google.com/document/d/1T96Tm3Y3NCOMsv0D_r8MXSVQ_k9V6IZU8tIcmMt1c2E/edit

Consider the table, which contains hypothetical data on the long‑run average cost values for the refrigerator industry.

a, c c, d d, f

Many colleges and universities are witnessing a shift in demographics due to women having fewer children today. The birth rate fell from an average of 2.1 births per woman in 2007 to 1.7 births in 2018. The declining birth rate will reduce the college-age population by as much as 15% between 2025 and 2029. Consider how the declining birth rate will affect university operations.

a. fixed costs: - salaries and benefits... - upkeep and university... - land and building... - maintenance of research... variable costs: - compensation of... - cafeteria staff... b. large c. it will rise substantially

Suppose Ralph has a chicken processing plant with the total cost function shown in the accopmanying table.

fixed cost: $800 # of workers hired: 8 Why does total cost increase faster as output increases?: There are diminishing returns to labor.

A firm's ___________________ are costs that are incurred even if there is no output. In the short run, these costs ___________________ as production increases.

fixed costs; do not change

One thing that distinguishes the short run and the long run is

the existence of at least one fixed input.

Which of the statements is not true?

- NOT TRUE: Costs that are small and unimportant with little impact on profits are called marginal costs. - Marginal cost and marginal productivity are inversely related. - Marginal cost is the change in a firm's total cost due to a one‑unit change in output. - A marginal cost curve will always intersect the average total cost curve at the minimum average total cost. What is the marginal cost of the eighth unit based on the table? $50

Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 2.0% in 2015, compared to 2014.

- increase - increase - increase - increase

The table shows the cost structure of a firm producing computer mainframes. Calculate the missing values A through H and enter these into the boxes provided.

A:20000 B:20000 C:277.78 D:384.16 E: 833.33 F: 833.33 G: 384.62 H: 319.15

In the long run, choosing a higher level of fixed cost shifts the long-run average total cost curve upward.

False; choosing a higher level of fixed cost causes rightward movement along the long-run average total cost curve. The average total cost curve remains the same.

Marty's Frozen Yogurt is a small shop that sells cups of frozen yogurt in a university town. Marty owns three frozen yogurt machines. His other inputs are refrigerators, frozen yogurt mix, cups, sprinkle toppings, and, of course, workers. He estimates that his daily production function when he varies the number of workers employed (and at the same time, of course, yogurt mix, cups, and so on) is as shown in the accompanying table.

Fixed inputs: - refrigerators - frozen yogurt machines - frozen yogurt shot Variable inputs: - frozen yogurt mix - cups - sprinkle toppings - labor c. Marginal product of the first worker: 110 Marginal product of the second worker: 90 Third worker: 70 Why does marginal product decline as the number of workers increases?: The number of workers increases, but the number of yogurt machines does not. Since additional workers reduce each worker's access to capital, each additional worker contributes less to total output.

The production function for Marty's Frozen Yogurt is shown in the accompanying table. Marty pays each of his workers $80 per day. The cost of his other variable inputs is $0.50 per cup of yogurt. His fixed cost is $100 per day.

Image in link: https://docs.google.com/document/d/1T96Tm3Y3NCOMsv0D_r8MXSVQ_k9V6IZU8tIcmMt1c2E/edit c. the fixed cost... spreading effect the amount... diminishing... d. 270

An increase in labor productivity means that each worker can produce more output. Recent data on productivity show that labor productivity in the U.S. nonfarm business sector grew by 1.7% between 1970 and 1999, by 2.6% between 2000 and 2009, and by 1.1% between 2010 and 2015.

Increases in labor productivity will lower the cost of production, counteracting the effects of the labor cost increase.

Information regarding a firm's costs is presented in the accompanying table.

Total cost, 𝑄=1: $40 𝐴𝑇𝐶, 𝑄=1: $40 𝐴𝑉𝐶, 𝑄=1: $20 Total cost, 𝑄=5: $110 𝐴𝑇𝐶, 𝑄=5: $22 𝐴𝑉𝐶, 𝑄=5: $18

A decreasing marginal product tells us that marginal cost must be rising.

True; a decreasing marginal product implies that additional units of output require larger and larger increments of the variable input; thus, marginal cost increases.

An increase in fixed cost increases the minimum-cost output.

True; if fixed costs increase, the spreading effect strengthens relative to the diminishing returns effect. Accordingly, the level of output that minimizes average total cost rises.

The short-run average total cost can never be less than the long-run average total cost.

True; the long-run average total cost is given by the ideal level of fixed input, whereas short-run average total cost is given by an arbitrary level of fixed input.

The production function for Marty's Frozen Yogurt is shown in the accompanying table. Marty pays each of his workers $80 per day. The cost of his other variable inputs is $0.50 per cup of yogurt. His fixed cost is $100 per day.

Variable cost, 𝑄=110: $135 Variable cost, 𝑄=200: $260 Variable cost, 𝑄=270: $375 Variable cost, 𝑄=300: $470 Total cost, 𝑄=320: $660 Total cost, 𝑄=110: $235 Total cost, 𝑄=200: $360 Total cost, 𝑄=270: $475 Total cost, 𝑄=300: $570 Variable cost, 𝑄=320: $560 𝑀𝐶,𝑄=110 to 𝑄=200: $1.39 𝑀𝐶,𝑄=300 to 𝑄=320: $4.50

Candice is a jewelry shop owner, specializing in beaded necklaces. For each of the following inputs, indicate which items are variable inputs as opposed to fixed inputs in the long run.

Variable inputs include: computers shipping two-year lease on office and retail space chairs hourly labor upper management salaries beads

Consider Daniella's concrete-mixing business described in Problem 12. Assume that Daniella purchased 3 trucks, expecting to produce 40 orders per week.

a. $440, $297 b. $400, smaller, falls

In your economics class, each homework problem set is graded on the basis of a maximum score of 100. You have completed 9 out of 10 of the problem sets for the term, and your current average grade is 88.

a. 89 to 100 b. 0 to 87 c. rise .... fall

Complete the following passage to describe the difference between diminishing marginal returns to labor and decreasing returns to scale.

a. A decline in marginal product...4....short run b. In increase in average total... 99...long run

Determine if the statements and expressions regarding costs are true or false.

a. All costs are either fixed or variable: True b. Average fixed cost is always higher than average variable cost: False c. The average fixed cost curve is downward-sloping: true d. In the short run, ATC is always greater than or equal to AVC: true e. The ATC curve crosses the MC curve at the lowest point on the MC curve: false f: true g. The ATC is increasing whenever the MC is increasing: false h. Marginal cost refers to the change in total cost associated with the production of another unit: true i. The VC curve is modeled as a horizontal line: false j: false

Magnificent Blooms is a florist specializing in floral arrangements for weddings, graduations, and other events. Magnificent Blooms has a fixed cost associated with space and equipment of $100 per day. Each worker is paid $50 per day. The daily production function for Magnificent Blooms is shown in the accompanying table.

a. Calculate the marginal product of each worker. 1 worker - 5 2 - 4 3 - 3 4 - 2 5 - 1 What principle explains why the marginal product per worker declines as the number of workers employed increases?: The principle of diminishing returns to an input b. Calculate the marginal cost of each level of output. 5 floral arrangements - $10 9 - $12.50 12 - $16.67 14 - $25 15 - $50 What principle explains why the marginal cost per floral arrangement increases as the number of arrangements increases?: The principle of diminishing returns to an input

Daniella owns a small concrete-mixing company. Her fixed cost is the cost of the concrete-batching machinery and her mixer trucks. Her variable cost is the cost of the sand, gravel, and other inputs for producing concrete; the gas and maintenance for the machinery and trucks; and her workers. She is trying to decide how many mixer trucks to purchase. She has estimated the costs shown in the accompanying table based on estimates of the number of orders that her company will receive per week.

a. For each level of fixed cost (i.e., for each number of mixer trucks), calculate Daniella's total cost of producing 20, 40, and 60 orders per week. 20 orders 2 trucks: $8,000 60, 2: $18,000 40, 2: $11,000 30, 3: $8,800 60, 3: $17,800 40, 3: $10,800 20, 4: $9,200 40, 4: $11,600 60, 4: 16,400 b. If Daniella is producing 20 orders per week, how many trucks should she purchase, and what will her average total cost be? Round average total cost to the nearest dollar. - two - $400 If Daniella is producing 40 orders per week, how many trucks should she purchase, and what will her average total cost be? Round the average total cost to the nearest dollar. - three - $270 If Daniella is producing 60 orders per week, how many trucks should she purchase, and what will her average total cost be? Round the average total cost to the nearest dollar. - four - $273

Everything Looks Like a Nail, Inc. is a manufacturing company that produces hammers. The company faces various fixed and variable costs in the short run. Determine which of Everything Looks Like a Nail's costs are fixed costs and which are variable costs. Assume the company cannot easily adjust the amount of capital that it uses and that salaries are negotiated only once per year.

a. Postage and packaging costs: variable cost. b. Lease on building: fixed cost. c. Cost of wood used in manufacturing: variable cost. d. Industrial equipment costs: fixed cost. e. Interest on current debt: fixed cost f. Liability insurance costs: fixed cost g. Cost of metal used in manufacturing: variable cost h. Annual salaries of top management: fixed cost

Changes in the prices of key commodities have a significant impact on a company's bottom line. For virtually all companies, the price of energy is a substantial portion of their costs. In addition, many industries, such as those that produce beef, chicken, high-fructose corn syrup, and ethanol, are highly dependent on the price of corn. In particular, corn has seen a significant increase in price.

a. There is usually a fixed energy cost associated with overhead that does not change with output, but producing more output typically takes more energy. c. Corn is a raw ingredient in the production of ethanol. An ethanol producer adjusts its corn purchases to meet its ethanol production targets

You produce widgets. Currently, you produce four widgets at a total cost of $40.

a. What is your average total cost?: $10 b. Suppose you could produce one more (the fifth) widget at a marginal cost of $5. If you do produce that fifth widget, what will your average total cost be?: $9 Has your average total cost (ATC) increased or decreased? Why? - ATC has decreased, since marginal cost is below ATC. c. Suppose instead that you could produce one more (the fifth) widget at a marginal cost of $20. If you do produce that fifth widget, what will your average total cost be?: $12 Has your ATC increased or decreased? Why? - ATC has increased since marginal cost is above ATC.

In 2017, Tesla Motors released the Model 3. The Model 3 is an all-wheel-drive, luxury sedan. It uses no gasoline and has a range of 220 to 310 miles per charge. Pre-orders for the Model 3 exceeded 450,000 units. To meet demand for the Model 3, Tesla announced it will increase production at its production facility to 6,000 cars per week, or about 300,000 cars per year. Currently, the plant is equipped to produce about 100,000 cars per year.

a. image in link: https://docs.google.com/document/d/1T96Tm3Y3NCOMsv0D_r8MXSVQ_k9V6IZU8tIcmMt1c2E/edit b. - more - more - lowering variable

Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW's long-run average total cost.

a. one, four b. six, eight c. four, six

The long run is best defined as a time period

during which all inputs can be varied.

The graph shows the costs of a firm in the short run. Match the labels to the curves they best represent. Note that not all labels will be used.

image in link: https://docs.google.com/document/d/1T96Tm3Y3NCOMsv0D_r8MXSVQ_k9V6IZU8tIcmMt1c2E/edit

Sandra and Trey operate a small company that produces souvenir footballs. Their fixed cost is $2,000 per month. They can hire workers for $1,000 per worker per month. Their monthly production function for footballs is as given in the accompanying table.

image in link: https://docs.google.com/document/d/1T96Tm3Y3NCOMsv0D_r8MXSVQ_k9V6IZU8tIcmMt1c2E/edit c. 1,200

A firm's ___________________ are costs that increase as quantity produced increases. These costs often show ___________________ illustrated by the increasingly steeper slope of the total cost curve.

variable costs; diminishing marginal returns