Micro Economics Chapter 11

With a small number of workers and a low quantity of output, employing additional workers allows the workers to specialize and causes the marginal cost curve to slope:

downward.

The long run is best defined as a time period

during which all inputs can be varied.

According to the spreading effect, as output increases, average ________ cost decreases.

fixed

When average _____ cost is equal to marginal cost, average total cost is minimized.

total

Bruno's Gelato Café has a fixed cost of $100. The variable cost of producing 10 gelatos is $20, and the variable cost of producing 11 gelatos is $22. What is the total cost and marginal cost of producing 11 gelatos?

$122; $2 The total cost is equal to fixed cost ($100) + variable cost ($22) = $122. The marginal cost is the change in total cost from producing 10 gelatos ($120) and 11 gelatos ($122).

Average fixed cost is $2 and average total cost is $6 when Randall produces three units. At three units, Randall's variable cost is $_____.

12 2-6=4 4*3=12

The Supreme Bean coffee kiosk makes 100 cups of coffee per day. Associated with this it has the following costs: $20 per day in rent, $100 per day in coffee beans, $50 per day in barista labor, $10 per day in utilities, $20 per day in other supplies. What is the average total cost of the 100 cups of coffee?

2.00

The table shows the costs of washing cars at Bruno's Car Wash. Quantity of cars Fixed cost, FC Variable cost, VC Total cost, TC 0 $30 $0 $30 1 30 15 45 2 30 25 55 3 30 45 75 4 30 70 100 5 30 100 135 6 30 135 165 The marginal cost of washing the third car is $_____. (Note: Enter your answer as a numeral.)

20 25-45=20

If the fixed cost of Alex's engraving business is $100, and the variable cost of each engraving job is $20, what is the marginal cost of the second engraving job?

20 Marginal cost equals change in total variable cost divided by the change in quantity, thus $20 /1 = 20

If Jerry produces four units, his average fixed cost is $1.50 and his average variable cost is $4.50. Jerry's total cost to produce four units is:

24

If the average variable cost of producing 5 costumes in Kira's Costume Shop is $50 per costume, and the fixed cost of the shop is $100, what is the total cost for 5 costumes?

350 AVC = TVC / No of units 50 = TVC / 5 TVC = 250 Total cost = TVC + TFC = 250 + 100 = 350

The table shows daily costs for producing jalapeño peanut butter. Quantity of peanut butter (cases) Fixed cost Variable cost Total cost 0 $120 $0 $120 1 120 13 133 2 120 53 173 3 120 119 239 4 120 203 323 5 120 330 450 The marginal cost of the second case of peanut butter is:

40

The table here gives the production function for Andrew's Garage. Number of WorkersTotal Number of Cars Serviced 0 0 1 12 2 22 3 30 4 36 5 40 6 42 If labor is the variable input and number of cars serviced is the output, the marginal product of the fourth worker is _____ car(s). (Note: Enter your answer as a numeral.)

6

What is the marginal cost of the ninth unit based on the table? Output 0 1 2 3 4 5 6 7 8 9 10 Total cost 100 110 115 125 140 160 190 230 280 340 420

60 --------------------- The added cost for each additional unit of output is the marginal cost. Initially marginal product may increase as the firm moves toward the technically optimal combination of labor and capital. Adding more workers to a fixed capital stock will eventually mean the marginal product of labor will fall. As marginal productivity declines, the cost of producing additional units of output will rise. If marginal cost is lower than the average cost, the average cost will fall, but if it is higher than the average, the average will rise. Since it starts low, initially the marginal cost pulls the average cost down, but since it rises, eventually it will grow above the average and pull the average up. Marginal cost is measured as the change in total costs due to a unit change in output.

The table here gives the production function for Andrew's Garage. Number of Workers Total Number of Cars Serviced 0 0 1 12 2 22 3 30 4 36 5 40 6 42 If labor is the variable input and number of cars serviced is the output, the marginal product of the third worker is _____ car(s). (Note: Enter your answer as a numeral.)

8 22-30=8

Which is the best example of a firm adding a variable input?

A pottery studio purchases clay for making vases.

The graph shows the long-run average cost and short-run average costs of three different plant sizes for Game Day Shirts.

ATC1

The graph shows the long-run average cost and short-run average costs of three different plant sizes for Game Day Shirts.

ATC3

An input whose quantity the firm can change at any point in time is known as a:

An input whose quantity the firm can change at any point in time is known as a:

Babel, an architectural firm, is aspiring to build the world's largest tower. The table provides Babel's production function. On the first graph, graph Babel's production function. On the second graph, plot the marginal product of labor for Babel. Quantity of workers Quantity of bricks laid (thousands) 0 0 1 4 2 7 3 9 4 10

Anonymous answered this 10,667 answers Quantity of labor Quantity of bricks laid Marginal product (TPn-TPn-1) 0 0 - 1 4 4-0=4 2 7 7-4=3 3 9 9-7=2 4 10 10-9=1 ----------------------------------- The first graph is the production function graphed. To calculate the marginal product of labor (MPL), Workers employedChange in number of bricks per worker1144223333224411 MPL=ΔQbricksΔQworkersMPL=Δ⁢QbricksΔ⁢Qworkers For example, for the second worker hired, MPL=7−42−1=31=3MPL=7−42−1=31=3 The calculation for the MPL for all the workers is in the table. This is then graphed in the second graph.

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

Which of the statements is 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.

Costs that are small and unimportant with little impact on profits are called marginal costs.

Assume the following table described the production function for haircuts. From 2 to 3 workers the marginal product of workers:

Decreases The marginal product of the 2nd worker is 15, the 3rd worker is 10, and the 4th worker is 5.

Tina's Craft Palace is eager to expand her production of hand-made quilts. Which of the following would be least helpful in achieving her goal?

Extending her lease on her existing factory this would not help her in expanding the production of hand-made quilts

Suppose that the average score in a class before the final exam was 80%. The average score on the final exam was 85%. How does the marginal score (final exam average) affect overall grades?

The marginal score lies above the average and overall grades rise. If the marginal score (85%) is greater than the average score (80%), the overall grade will rise.

You're writing a term paper for one of your courses. Which is the most fixed input in your production of a good grade on the paper?

The amount of time you have to write the paper.

Consider the table. Labor (hours) Quantity Fixed Cost ($) Variable Cost ($) Total Cost ($) Marginal Cost ($) Average Cost ($) AVC* ($) 0 0 10,000 0 10,000 - - - 40 18 10,000 5,000 15,000 C F 277.78 50 45 10,000 10,000 B 185.19 444.44 222.22 60 65 10,000 15,000 25,000 250.00 384.62 230.77 70 78 10,000 A 30,000 D G 256.41 80 88 10,000 25,000 35,000 500.00 397.73 284.09 90 94 10,000 30,000 40,000 E 425.53 H *Average Variable Cost 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.

The answer to A is 20,000. In this situation, variable costs can be calculated by simply subtracting the fixed cost from the total cost. 30,000−10,000=20,000 The answer to B is also 20,000, where total costs can be calculated by adding the fixed cost and the variable cost. 10,000+10,000=20,000 The answers to C, D, and E are 277.78, 384.62, and 833.33, respectively. To calculate marginal cost, you need to divide the change in total cost by the change in the quantity. In C, for example, the change in total cost is 5,000 and the change in quantity is 18. Use this formula to calculate the value for C, D, and E. (15,000−10,000)(18−0)=277.78 The answer to F is 833.33 and G 384.62. To calculate the average cost (or average total cost), you need to divide the total cost by quantity. For F, total cost is 15,000 and quantity is 18. For G, total cost (30,000) divided by quantity (78) equals 384.62. 15,00018=833.33 The answer to H is 319.15. To calculate the average variable cost, you need to divide the variable cost by quantity. For H, the variable cost is 30,000 and the quantity is 94. 30,00094=319.15

If the marginal cost of production is greater than the average cost, in what direction must the average cost be changing, if any?

The average cost must be rising. When the average variable cost is increasing, then the last unit produced is adding more to total variable cost than the previous units thus marginal cost of production is greater than the average cost

Varun's Coaching Center trains runners for elite races. Last week, Varun fired one of his ineffective coaches, and immediately the performance of the runners improved. What does this suggest about the marginal product of the previous coach?

The marginal product was negative. Marginal product is the extra output produced by the last unit of the variable factor employed by the firm. In this case, the coaching center is representing that firm and the last unit of a variable factor in this case is the coach that trains runners. It is given that the removal of the last coach has increased the performance of runners which means the total product has increased. This implies that the marginal product was not zero because the total product has increased by reducing the unit of the variable factor. The marginal product was actually negative and as soon as one unit of a variable factor is removed the marginal product is improved which improves the total product as well

Which of the following expenses would be a fixed cost for a party cruise ship?

The port docking fee. The fixed costs are those costs that are independent of the output (here the number of people who are on the ship) and have to be paid even with 0 passengers. Since the port docking fee is the same irrespective of the number of people partying on the cruise, it is a fixed cost

There is generally a trade-off between _____ fixed cost and _____ variable cost for any output level.

There is a trade-off between higher fixed cost and lower variable cost for any output level.

Quantity of workers Quantity of cupcakes (in dozens) 0 0 1 6 2 15 3 24 4 27 5 30 6 30 Earl owns and operates a food trailer at the State Fair. After being featured on a national televison network, his deep‑fried cupcakes dramatically increase in popularity, and Earl hires more workers at a cost of $80 per worker per day. Earl also pays $40 per day just to park his trailer, even if he has no workers. The table shows the number of workers and the number of cupcakes that they can produce in a day. On the first graph, plot Earl's production function per day.

Total cost , TC = Fixed cost + Variable cost TC = 40 + (80)L When Q=0,then L-0 and therefore TC =40 When Q=6 ,then L=1 , therefore, TC =40+80= 120 When Q=15 , then L=2 ,therefore TC = 40+160= 200 When Q=24, then L=3 therefore TC = 40+ 240= 280 When Q=27 ,then L=4 ,therefore TC = 40+ 320= 360 When Q=30 ,then L=5 ,therefore TC= 40+400 = 440 When Q= 30 ,then L=6 ,therefore TC= 40+480= 520 ------------------ Diminishing marginal product: Earl's production function displays the increase in his production of cupcakes due to each additional worker. The first few additional workers dramatically increase the ability of Earl's trailer to produce cupcakes. However, each additional worker will eventually begin to add fewer and fewer cupcakes, illustrating the principle of diminishing marginal product. At some point, the trailer starts getting too crowded, and additional workers interfere with each other. As shown in the first graph, the addition of the sixth worker will not add any additional cupcakes to Earl's production function (although this is not always the case). The total‑cost curve plots the cost of Earl's production function, the cost of each additional worker measured against his or her additional output. Toward the end of the curve, it gets much steeper, eventually reaching a perfectly vertical step as a result of diminishing marginal product. Notice the relationship between the two curves. As the production function gets flatter, the total‑cost curve gets steeper. In other words, as each additional worker adds less and less additional production, the more each worker adds to the cost of increasing production. Production function: Plot the production function according to the data points in the table. That is, 0 workers produce 0 cupcakes, 1 worker produces 6 dozen cupcakes, 2 workers produce a total of 15 dozen cupcakes, and so on. Note that, with the addition of the third worker, each additional worker adds less to total product than the previous worker. At this point, diminishing marginal product sets in. Cost curve: Note that Earl faces $40 worth of fixed costs. Fixed costs are costs incurred independent of output. So, whether Earl's trailer makes 0 cupcakes or 30 dozen cupcakes, Earl faces $40 costs in addition to any other expenses, such as labor. In this example, costs equal $40 even when output is zero. Beyond that, determine how many workers it requires to make the listed number of cupcakes, multiply that number $80, and add fixed costs, $40.

Short Run

Variable Cost + Fixed cost = Total Cost

Long Run

Variable Cost = Total Cost

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 - upper management salaries, hourly labour, chairs, computer, beads, two year lease on office and shipping, retail space.

When a firm is experiencing constant returns to scale, the long-run average total cost curve is:

horizontal.

If long-run average total cost declines when output is increasing, then the cost curves exhibit _____ returns to scale.

increasing

Consider the table, which contains hypothetical data on the long‑run average cost values for the refrigerator industry. Quantity produced Long‑run average cost A 10,000 $1,200 B 20,000 $900 C 30,000 $700 D 40,000 $700 E 50,000 $800 F 60,000 $1,000

a) Economies of scale begin at 10000 units of output and ends at 30000 units of output. b) Constant returns to scale begin at 30000 units of output and ends at 40000 units of output. c) Diseconomies of scale begins at 40000 units of output and ends at 60000 units of output. ---------------------------------- The given graph shows the long‑run average cost curve for the refrigerator industry. Note that you can see the economies of scale, or decreasing average costs, occur between A and C. More specifically, the long‑run average cost decreases from $1,200 (at A) to $900 (at B) to $700 (at C). Constant returns to scale, or no change in average costs, occurs between C and D. Here, the long‑run average cost is a constant $700 (at C and D). Diseconomies of scale, or increasing average costs, occurs between D and F. In this case, long‑run average cost increases from $700 (at D) to $800 (at E) and then increases again to $1,000 (at F).

Determine if the statements and expressions regarding costs are true or false. a. All costs are either fixed or variable. b. Average fixed cost is always higher than average variable cost. c. The average fixed cost curve is downward-sloping. d. In the short run, ATC is always greater than or equal to AVC. e. The ATC curve crosses the MC curve at the lowest point on the MC curve. f. ATC=FC+VCQ

a) TRUE - All cost in terms of production are cosndiered either fixed or varibale .The fixed cost are contant like rent or land while the variable cost can vary . b) FALSE - The average total cost is always a fixed amount larger than the average variable cost.The AFC is fixed but the AVC can vary .Also AFC decreases when the no. of units of good produced increased. c) TRUE -Becaue AFC decrease when the number of unit produced is increased. So thats why it downward sloping d) TRUE-Becasue ATC is equal to AFC plus AVC .That is why it always greater because of the addition of a constant with the AVC e) FASLE-Because the marginal cost of producing the next unit of output constantly affects the average total cost, the marginal cost curve always crosses the average total cost curve at its lowest point. As a result, if the marginal cost is smaller than the average total cost, the average total cost will decrease. f) TRUE - Because ATC is equal to Total cost which includes FC and VC .Then for average it is divided by number of quantity Q to get the per product cost . g) FALSE -Because of fixed costs, marginal cost nearly always starts lower than the average total cost. As the volume rises, ATC decreases and MC increases. They eventually collide, and MC continues to rise, dragging ATC up with it. h) TRUE -Because MC is defined as difference in the production output or change in TC by an additonal unit production.So it is correct i) FALSE -Because varibale curve always vary directly with the level of output .The FC curve is a horizontal line parallel to x axis j) FALSE - because Total cost of production (TC) = FC + VC . --------------------- There are five true statements in this question. The AFC curve is always downward-sloping when fixed costs are positive. Fixed costs by definition remain constant. As FCs are spread across an increasingly large quantity, the AFC must fall. The MC is defined as the change in total cost from producing one more unit. The ATC is always greater than or equal to the AVC. Recall that ATC=AVC+AFCATC=AVC+AFC and AFC is always positive. Adding a positive number to the AVC results in an ATC that exceeds the AVC. If the AFC is equal to 00, the ATC will equal the AVC, or ATC=AVCATC=AVC. Fixed costs are costs that do not change as output changes. Variable costs are costs that do change as output changes. All costs have one or the other of these properties, meaning that TC=VC+FCTC=VC+FC. Average total cost is total cost divided by quantity. Total cost is the sum of fixed and variable costs. Therefore, ATC=FC+VCQATC=FC+VCQ. The remaining statements are false. It is possible that fixed costs exceed variable costs and vice versa, so the AFC is not always higher than the AVC. Total cost equals the sum of fixed cost and variable cost, not the sum of fixed cost, variable cost, and marginal cost. Marginal cost is a measure of variable costs. The FC curve is horizontal, not the VC curve. The MC increasing or decreasing does not cause the ATC to rise or fall. Instead, the ATC rises when MC>ATCMC>ATC and falls when MC<ATCMC<ATC. The MC crosses the ATC at its minimum, not the other way around.

The table shows a production function for game-day T-shirts. Labor Output 0 0 1 4 2 10 3 13 4 15 5 16 When 15 T-shirts are produced, marginal cost is:

increasing.

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.)

a) The answer is "marginal cost". The formula of marginal cost is, Marginal Cost = \DeltaTC (Total Cost) / \DeltaQ (Quantity). Therefore, here \DeltaTC / \DeltaQ = Marginal Cost. Hence "marginal cost" is the correct answer. b) The answer is "marginal cost". The marginal cost is that cost which occur when the firm produce additional 1 unit of production. So, we can say that the marginal cost is that amount of increased total cost which occur due to the production of additional 1 unit. Hence "marginal cost" is the correct answer. c) The answer is "average total cost". The formula of average total cost is, Average total cost = TC (Total Cost) / Q (Quantity). Therefore, here TC / Q = Average total cost. Hence "average total cost" is the correct answer. d) The answer is "average total cost". The formula of average total cost is, Average total cost = TC (Total Cost) / Q (Quantity). So, to obtain the average total cost we divide the total cost by the quantity of output. Hence "average total cost" is the correct answer. e) The answer is "marginal cost". The formula of marginal cost is, Marginal Cost = \DeltaTC (Total Cost) / \DeltaQ (Output). So, to get the marginal cost we divide the changes in total cost by the changes in output level. Hence "marginal cost" is the correct answer. f) The answer is "average variable cost". The formula of average variable cost is, Average variable cost = VC (Variable Cost) / Q (Quantity). Therefore, here VC / Q = Average variable cost. Hence "average variable cost" is the correct answer. g) The answer is "average variable cost". -------------------- Average variable cost is defined as variable cost per unit of output or VC (variable cost) divided by Q (quantity). Marginal cost can be defined as the extra cost of producing one additional unit of output. It is calculated by dividing the change in total cost by the change in quantity produced. This can also be expressed as ΔTC/ΔQΔTC/ΔQ, where Δ means "change in." Average cost or average total cost is simply total cost divided by quantity, or TC/QTC/Q.

Suppose Ralph has a chicken processing plant with the total cost function shown in the accopmanying table. Quantity of Chickens Total Cost ($) 0 800 1,000 1,000 2,000 1,200 3,000 1,400 4,000 1,500 5,000 1,600 6,000 1,800 7,000 2,000 8,000 2,400 a) What is Ralph's fixed cost? Ralph pays his workers $100 each, and labor is the only variable cost. At a quantity of 6000 chickens, how many workers does he hire? b) number of workers Ralph hires: c) Why does total cost increase faster as output increases?

a)800 b)10 c)There are diminishing returns to labor. --------------- Fixed costs do not change as output changes. For Ralph, this could be the cost associated with land or equipment. Because the fixed costs do not change as output changes, they take the same value at all quantities, even a quantity of zero. The total cost curve shows that the total cost of producing zero chickens is $800. This is Ralph's fixed cost. At a quantity of 6000 chickens, the total cost is equal to $1800. Here, this cost is made up of the fixed cost and whatever Ralph pays his workers. Workers cost Ralph $100 each, which allows for the calculation total cost=fixed cost+variable cost $1800=$800+$100×number of workers number of workers=10 The total cost curve gets steeper as output increases because there are diminishing returns to labor. Each additional worker adds slightly less output. The fixed cost does not increase and increasing variable costs are indicative of a positive‑sloping total cost curve.

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

a. variable cost b. fixed cost c. variable cost d. fixed cost e. fixed cost f. variable cost g. variable cost h. fixed cost ----------------- Fixed costs are payments that must be made regardless of the level of production. Even if Everything Looks Like a Nail, Inc. produces no hammers this month, they still have to pay their fixed costs: lease on the building interest on debt industrial equipment costs salaries of top management and key personnel liability insurance costs Note that these costs are not fixed forever, but they are fixed in the short run. Variable costs are the costs of production that change with the quantity produced. The more hammers produced by Everything Looks Like a Nail, Inc., the more the company would need to spend on their variable costs: metal for manufacturing wood for manufacturing postage and packaging Furthermore, the company does not face these variable costs if production is zero.

As more high-speed trains are built, each additional engineer hired to manage construction is likely to increase production

at a slower pace, due to diminishing returns. there will initially be a rise but because more engineers are being employed on construction will increase production but at a slower pace due to diminishing return for cost of employing marginal engineers will be more.

The long-run average total cost curve is made up of a series of short-run _____ cost curves.

average total

The long-run average total cost curve shows the relationship between output and the average total cost when fixed cost has been chosen to minimize _____ for each level of output.

average total cost

If long-run average total cost is constant when output is increasing, then the cost curves exhibit _____ returns to scale.

constant

A firm experiencing increasing returns to scale will see long-run average total cost _____ as output increases.

decrease

The table shows a production function for game-day T-shirts. Labor Output 0 0 1 4 2 10 3 13 4 15 5 16 Capital is the fixed input, and there are two machines used in the design and production of the shirts. This production process is characterized by _____.

diminishing marginal returns

In the short-run, a change in output will cause a firm to:

move along their current short-run average total cost curve.

Suppose you are the owner of a small t-shirt printing business. While conducting a cost analysis of your business, you find that at current production levels, your average total cost (ATC) is $10. You also know that if you increase production by one more unit, the marginal cost of that unit will be $5. If you produce another t-shirt:

the average total cost of production will decrease. MC decreasing/increasing for the very next unit because it depends on what point of the MC curve the current production level is. But one thing is for sure is that the ATC would decrease for the next unit produced because ATC is = total cost/output. Because the total output produced is in the denominator, the next unit produced would definitely reduce the ATC as this cost would spread over a larger output.

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

the existence of at least one fixed input. The long run will vary from firm to firm, because the difficulty of changing the scale of operations will vary. The short run can be defined as a time short enough that at least one input (usually capital) cannot be changed. The short run and the long run refer to the production of goods and services, not their demand. Since there are no fixed inputs in the long run, there are no fixed costs. In the short run, the cost of at least one input is fixed because the input itself is fixed. Short‑run and long‑run production functions are the same, except there is the constraint of a fixed input in the short run. Implicit costs and marginal costs occur in both the short and long runs.

The table shows a production function for game-day T-shirts. Labor Output 0 0 1 4 2 10 3 13 4 15 5 16 Capital is the fixed input, and there are two machines used in the design and production of the shirts. The total product curve for this production process would be:

upward sloping.

variable costs; diminishing marginal returns

variable costs; diminishing marginal returns A firm's variable costs will increase as production increases because the firm needs to use more variable inputs, such as workers and manufacturing materials. Variable costs often show diminishing marginal returns; the marginal gain in output is decreasing for each new variable input. This results in increasing cost per unit of output. For example, if a farmer decides to bring in a new machine to help with crop harvesting, this may result in increasing marginal returns as it could significantly increase productivity. However, if the farmer kept adding more and more machines, he would reach a point where there were too many machines and these would practically crashing into each other. At this point diminishing marginal returns would kick in. Fixed costs are costs made before manufacturing begins, such as the cost of building manufacturing facilities and the mortgage paid on those facilities. Fixed costs must be paid regardless of the level of production. In the short run fixed costs do not change, as building new manufacturing facilities takes time. In the long run all costs are potentially variable, as new facilities could be constructed.

Sal owns a bakery in a building with a fixed amount of space. Sal buys baking ingredients and hires workers to help bake. In the short run, Sal's bakery:

will eventually experience diminishing marginal returns to labor if Sal hires more and more workers.