Principles of Microeconomics
Explicit costs
require an outlay of money by the firm
Because the goods offered for sale in a competitive market are largely the same,
sellers will have little reason to charge less than the going market price
A firm that shuts down temporarily
still has to pay its fixed costs, but not its variable costs
Refer to Table 13-1. the average variable cost of producing four widgets is
$2.50
Ball Bearings Inc. faces costs of production as follows: quantity: 0, 1, 2, 3, 4, 5, 6 total fixed costs: $100, $100, $100, $100, $100, $100, $100 total variable costs: $0, $50, $70, $90, $140, $200, $360 Calculate the company's average fixed costs, average variable costs, average total costs, and marginal costs.
AFC: -(100); 100; 50; 33.3; 25; 20; 16.67 AVC: --; 50; 35; 30; 35; 40; 60 ATC: -(100); 150; 85; 63.33; 60; 60; 76.67 MC: --; 50; 20; 20; 50; 60; 160
Firms would be encouraged to enter this market for all prices that exceed
P4
Does a firm's price equal marginal cost in the short run, in the long run, or both? Explain.
a firm's price equals marginal cost in both the short run and the long run. In both the short run and the long run, price equals marginal revenue. The firm should increase output as long as marginal revenue exceeds marginal cost, and reduce output if marginal revenue is less than marginal cost. Profits are maximized when marginal revenue equals marginal cost
Explain the difference between a firm's revenue and its profit. Which do firms maximize?
a firms revenue is the price of the item times the number of items sold. a firms profit is the total revenue minus the total cost of producing the item. Firms will maximize profit based on the intersection of MR and MC
In the long run, each firm in a competitive industry earns
a zero economic profit
Profit maximizing firms in competitive industries with free entry and exit face a price equal to the lowest possible
average total cost of production.
Which of the following statements is not correct?
averaged fixed costs are constant
The exit of existing firms from a competitive market will
decrease market supply and increase market price.
In the long run, when marginal cost is above average total cost, the average total cost curve exhibits
diseconomies of scale
Which of the following is not a characteristic of a competitive market?
entry is limited
in the long-run equilibrium of a market with free entry and exit, if all firms have the same cost structure, then
firms are operating at their efficient scale.
In a competitive market with identical firms,
free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.
Economists normally assume that the goal of a firm is to
maximize its profit
Suppose the book-printing industry is competitive and begins in long run equilibrium. Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books. What happens to Hi-Tech's profits and the price of books in the short run when Hi-Tech's patent prevents other firms from using the new technology?
the decrease in cost shifts marginal cost and average cost curve downward. since there is perfect competition in market, the market supply curve would remain unchanged. As a result, market price remains unchanged. thus, the profits of Hi-Tech printing company increases
A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200. Is the efficient scale of the firm more than, less than, or exactly 100 units?
the efficient scale of the firm must be less than 100 units
Average total cost is equal to
total cost/output
Bob's lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob's short-run decision regarding shutdown and his long-run decision regarding exit.
total variable cost for Bob's lawn-mowing service is 250 dollars and he earns a revenue of 270 dollars. So the average variable cost is 25 dollars and the price is 27 dollars. So bob would not shut down in the short-run instead he will focus on increasing the number of lawns he mows. If in the long-run the price falls below the average variable cost and remains for extended period of time Bob would have to exit
If a firm operating in a competitive industry shuts down in the short run, it can avoid paying
variable costs
Suppose the book-printing industry is competitive and begins in long run equilibrium. What happens in the long run when the patent expires and other firms are free to use the technology?
when patent expires, there would be no entry barrier. The firms would operate at efficient level and new firms would keep on entering til price falls to average at cost at efficient scale of operation. thus, in equilibrium, firms make zero profit
Refer to Table 13-1. The marginal cost of producing the sixth widget is
$6.00
Consider the total cost and total revenue given in the following table: quantity: 0, 1, 2, 3, 4, 5, 6, 7, total cost: $8, $9, $10, $11, $13, $19, $27, $37 total revenue: $0, $8, $16, $24, $32, $40, $48, $56 calculate profit for each quantity. How much should the firm produce to maximize profit?
1 = -8/2 = -1/3 = 6/4 = 19/5 = 21/6 = 21/7 = 19 maximizing profit is at a quantity of 5 or 6
Refer to Table 13-1. What is the total output when 5 workers are hired?
190
A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10. What is the average revenue, and how many units were sold?
$10 and $50
Refer to Table 13-1. The average fixed cost of producing five widgets is
$2.00
In the long run, a firm that produces and sells electronic book readers gets to choose
All of the above are correct.
An industry currently has 10 firms, all of which have fixed costs of $16 and average variable cost as follows: quantity: 1, 2, 3, 4, 5, 6 average variable cost: $1, $2, $3, $4, $5, $6 compute marginal cost and average total cost.
MC: 1, 3, 5, 7, 9, 11 ATC: 17, 10, 8.67, 8, 8.2, 8.67
one would expect to observe diminishing marginal product of labor when
crowded office space reduces the productivity of new workers
When a firm experiences diseconomies of scale,
long-run average total cost increases as output increases
When a firm experiences constant returns to scale,
long-run average total cost is unchanged, even when output increases.
Refer to Figure 14-5. In the short run, if the market price is higher than P1 but less than P4, individual firms in a competitive industry will earn
losses but will remain in business
In a competitive market, the actions of any single buyer or seller will
have a negligible impact on the market price
You go out to the best restaurant in town and ordered a lobster dinner for $40. After eating has of the lobster, you realize that you are quite full. Your date wants you to finish your dinner because you can't take it home and because "you've already paid for it" What should you do?
he should leave. The lobster that he hasn't eaten is a sunk cost, because he doesn't need it at the moment
If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long-run market supply curve
is horizontal and equal to the minimum of long-run average cost for each firm.
Refer to Figure 14-5. In the short run, if the market price is higher than P4 but less than P6, individual firms in a competitive industry will earn
positive profit
The market for fertilizer is perfectly competitive. Firms in the market are producing output but are currently making economic losses. how does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?
price = marginal cost price > average variable cost price < average total cost
When a perfectly competitive firm decides to shut down, it is most likely that
price is below the firm's average variable cost
The market for fertilizer is perfectly competitive. Firms in the market are producing output but are currently making economic losses. Assuming there is no change in demand or the firm's cost curves, explain what will happen in the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied by each firm, and the total quantity supplied to the market.
price of fertilizer will increase marginal cost will also increase average total cost will decrease quantity supplied by each firm will increase total quantity supplied to the market will remain the same
The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which
profit is maximized
Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises. What happens to the profits of boat makers in the short run? What happens to the number of boat makers in the long run?
profit of boat makers decreases. In short run, the number of boat makers remains unchanged but the equilibrium demand for boats would decrease. The total producer surplus decreases and each individual firm makes lower profit. In the long run, firms keep entering till zero profits are generated; since, the profits are lower, the condition of zero profit would reached for lower number of firms
A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200. what is profit?
profit: 200
If there is an increase in market demand in a perfectly competitive market, then in the short run
profits will rise
Total revenue equals
total output multiplied by price per unit of output
The amount of money that a firm receives from the sale of its output is called
total revenue
Refer to table 13-1. What is the variable cost of producing zero widgets?
$0
Refer to Table 13-1. What is the marginal cost of producing the first widget?
$1.00
Refer to Table 13-1. The average total cost of producing one widget is
$11.00
Refer to Table 13-1. What is the variable cost of producing five widgets?
$15.00
Economic profit is equal to (i) total revenue - (explicit costs + implicit costs) (ii) total revenue - opportunity costs (iii) accounting profit + implicit costs
(i) and (ii)
accounting profit is equal to (i) total revenue - implicit costs (ii) total revenue - opportunity costs (iii) economic profit + implicit costs
(iii) only
Refer to Table 13-2. What is the marginal product of the first worker?
200 units
Refer to table 13-2. What is the marginal product of the second worker?
250 units
Refer to Table 13-1. What is the total output when 1 worker is hired?
30
Grace is a self-employed artist. She can make 20 pieces of pottery per week. She is considering hiring her sister Kate to work for her. Kate can make 18 pieces of pottery per week. What would be the total output of Grace's firm if she hired her sister?
38 pieces of pottery
Refer to Table 13-1. What is total output when 2 workers are hired?
70
Refer to table 13-3. The marginal product of the second worker is
80
Jane's Juice Bar has the following cost schedule: quantity (vats of juice): 0; 1; 2; 3; 4; 5; 6 variable cost: $0; $10; $25; $45; $70; $100; $135 total cost: $30; $40; $55; $75; $100; $130; $165 Calculate average variable cost, average total cost, and marginal cost for each quantity.
ATC: --; 40; 28; 25; 25; 26; 28 AFC: --; 30; 15; 10; 8; 6; 5 AVC: --; 10; 13; 15; 18; 20; 23
Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs: quantity of houses painted per month: 1; 2; 3; 4; 5; 6; 7 variable costs: $10; $20; $40; $80; $160; $320; $640 Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company?
ATC: 210; 110; 80; 70; 72; 87; 120 AFC: 200; 100; 67; 50; 40; 33; 29 AVC: 10; 10; 13; 20; 32; 53; 91
Refer to Figure 14-5. Firms would be encouraged to enter this market for all prices that exceed
P3
If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
a one-unit decrease in output would increase the firm's profit
Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 132). Then the marginal product of the 13th worker is a. 8 units of output. b. 10 units of output. c. 122 units of output. d. 132 units of output.
a. 8 units of output
Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?
am accountant would not count the owner's opportunity cost of alternative employment as an accounting cost. An example is given in the text in which Helen runs a cookie business, but she could instead work as a computer programmer. Because she's working in her cookie factory, she gives up the opportunity to earn $100 per hour as a computer programmer. The accountant ignores this opportunity cost because no money flow occurs. But the cost is relevant to Helen's decision to run the cookie factory
Marginal cost tells us the
amount by which total cost rises when output is increased by one unit
The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is
an implicit cost
Fixed costs can be defined as costs that
are incurred even if nothing is produced
The city government is considering two tax proposals: 1. a lump-surtax of $300 on each producer of hamburgers 2. a tax of $1 per burger, paid by producers of hamburgers Which of these same four curves would shift as a result of the per-burger tax?
average fixed cost will be affected when per-burger tax is imposed
For a competitive firm,
average revenue = marginal revenue
__________ is falling when marginal cost is below it and rising when marginal cost is above it.
average total cost
Marginal cost is equal to averaged total cost when
average total cost is at its minimum
The city government is considering two tax proposals: 1. a lump-surtax of $300 on each producer of hamburgers 2. a tax of $1 per burger, paid by producers of hamburgers Which of the following curves -- average fixed cost, average variable cost, average total cost, and marginal cost -- would shift as a result of the lump-sum tax?
average total cost will be affected when lump-sum tax is imposed
Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus's output in a given day. Fill in the column for average total cost. (Recall that ATC = TC / Q).
average total cost: --; 300; 200; 167; 150; 140; 133; 129
When a firm in a competitive market receives $500 in total revenue, it has a marginal revenue of $10. What is the average revenue, and how many units were sold? a. $5 and 100 b. $10 and 50 c. $10 and 100 d. The answer cannot be determined from the information given.
b. $10 and 50
When firms are said to be price takers, it implies that if a firm raises its price,
buyers will go elsewhere
Which of the following is an implicit cost? (i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm (ii) interest paid on the firm's debt (iii) rent paid by the firm to lease office space a. (ii) and (iii) b. (i) and (iii) c. (i) only d. all of the above are correct
c. (i) only
John owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? a. wages John could earn washing windows b. dividends John's money was earning in the stock market before John sold his stock and bought a shoe-shine booth c. the cost of shoe polish d. all of the above are correct
c. the cost of shoe polish
in a perfectly competitive market, the process of entry and exit will end when, for firms in the market,
economic profits are zero
Define economies of scale and explain why they might arise. Define diseconomies of scales and explain why they might arise.
economies of scale exist when long run average total cost falls as the quantity of output increases, which occurs because of specialization among workers. Diseconomies of scale exist when long run average total cost rises as the quantity of output increases, which occurs because of coordination problems inherent in a large organization
For a firm in a perfectly competitive market, the price of the good is always
equal to marginal revenue
A firm's opportunity costs of production are equal to its
explicit cost + implicit costs
Draw the marginal-cost and average-total-cost curves for a typical firm. Explain why the curves have the shapes that they do and why they cross where they do.
figure 6 shows the marginal-cost curve & the average total cost curve for a typical firm. It has three main features: 1. marginal cost is rising, 2. average total cost is U-Shaped, & 3. whenever marginal cost is less than average total cost, average total cost is declining
A production function describes
how a firm turns inputs into output
A difference between explicit and implicit costs is that
implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.
How and why does a firm's average-total-cost curve differ in the short run and in the long run?
in the long run, a firm can adjust the factors of production that are fixed in the short run, for example, it can increase the size of its factory. As a result, the long run average total cost curve has a much flatter U-Shape than the short run average total cost curves
the marginal product of labor is equal to the
increase in output obtained from a one unit increase in labor
The entry of new firms into a competitive market will
increase market supply and decrease market prices
a production function is a relationship between
inputs and quantity of output
In the long run,
inputs that were fixed in the short run become variable
Economies of scale occur when
long-run average total costs fall as output increases
Diseconomies of scale occur when
long-run average total costs rise as output increases
The cost of producing an extra unit of output is the __________.
marginal cost
Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus's output in a given day. Now fill in the column for marginal cost. (Recall that MC = TC change / Q change).
marginal cost: --; 100; 100; 100; 100; 100; 100; 100
Accounting profit is equal to
total revenue minus the explicit cost of producing goods and services.
Consider the following cost information for a pizzeria: quantity (dozens): 0; 1; 2; 3; 4; 5; 6 total cost: $300; $350; $390; $420; $450; $490; $540 variable cost: $0; $50; $90; $120; $150; $190; $240 Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also, calculate the marginal cost per dozen pizzas using the information on variable cost.
marginal cost: --; 50; 40; 30; 30; 40; 50
What is marginal product, and what does it mean if it is diminishing?
marginal product is the increase in output that arises from an additional unit of input. Diminishing marginal product means that the marginal product of an input declines as the quantity of the input increases.
When a firm's only variable input is labor, then the slope of the production function measures the
marginal product of labor
A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught. Hours: 0; 1; 2; 3; 4; 5 quantity of fish (in pounds): 0; 10; 18; 24; 28; 30 What is the marginal product of each hour spent fishing?
marginal product: --; 10; 8; 6; 4; 2
Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus's output in a given day. Fill in the column of marginal products.
marginal product: --; 20; 30; 40; 30; 20; 10; 5
By comparing the marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the level that achieves its objective, which we assume to be
maximization of profit
What you give up for taking some action is called __________.
opportunity cost
Economic profit is equal to total revenue minus the
opportunity cost of producing goods and services
In the long run all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing form is
price < average total cost
a profit-maximizing firm will shut down in the short run when
price < average variable cost
explicit costs
require an outlay of money by the firm
For a certain firm, the number of workers hired is the only variable input. When this firm's production function is illustrated on a graph?
the number of workers is measured on the horizontal axis and the quantity of output is measured on the vertical axis
your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. What is your aunt's opportunity cost of running a hardware store for a year? if your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain.
the opportunity cost of running the hardware store is $550,000, consisting if $500,000 to rent the store & buy the stock & a $50,000 implicit cost, because your aunt would quit her job as an accountant to run the store. Because the total opportunity cost of $550,000 exceeds the projected revenue of $510,000, your aunt should not open the store, as her economic profit would be negative
What is the relationship between a firm's total revenue, profit, and total cost?
the relationship between a firms total revenue, profit, and total cost is profit equals total revenue minus total costs
When new firms enter a perfectly competitive market,
the short-run market supply curve shifts rights
When price is greater than marginal cost for a firm in a competitive market,
there are opportunities to increase profit by increasing production
average total cost is equal to
total cost/output
profits equal total revenue less __________.
total costs
the complete description of a competitive firm's short-run supply curve is as follows: the competitive firm's short run supply curve is that portion of the marginal cost curve that lies about above average
variable cost
In the ice-cream industry in the short run, ____________ includes the cost of cream and sugar but not the cost of the factory.
variable costs
your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. Define opportunity cost
whatever must be given up to obtain some item
In the short run, a firm incurs fixed costs
whether it produces output or not.
Economic profit
will never exceed accounting profit
In the short-run, a firm's supply curve is equal to the
marginal cost curve above its average variable cost curve.
Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward, and the market for pretzels is in long-run competitive equilibrium. The city wants to raise as much revenue as possible, while ensuring that all 800 licenses are sold. How high should the city set the license fee?
the license fee that brings the most money to the city is equal to (P2-ATC2)*q2, which is the amount of each firms profit
When entry and exit behavior of firms in an industry does not affect a firm's cost structure,
the long-run market supply curve must be horizontal
When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?
The long-run market supply curve will be upward sloping.
If firms are competitive and profit maximizing, the price of a good equals the
marginal cost of production
Refer to Figure 14-5. When market price is P5, a maximizing firm's profits can be represented by the area
(P5 - P4) * Q3
Refer to Figure 14-5. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area
(P7-P5) ' Q3
marginal cost equals (i) change in total cost divided by change in quantity produced (ii) change in variable cost divided by change in quantity produced (iii) the average fixed cost of the current unit
(i) an (ii)
A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200. what is average variable cost?
Average Variable Cost: 6
An industry currently has 10 firms, all of which have fixed costs of $16 and average variable cost as follows: quantity: 1, 2, 3, 4, 5, 6 average variable cost: $1, $2, $3, $4, $5, $6 As this market makes the transition to its long-run equilibrium, will the price rise or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall?
Figure 8 shows the current equilibrium in the market for pretzel. The supply curve, S1, intersects the demand curve at price P1. Each stand produces quantity q1 of pretzels, so the total number of pretzels produced is 1,000*q1. Stands earn zero profit because price is equal to ATC
Analyze the two following situations for firms in competitive markets: Suppose that TC = 100 + 15q, where TC is total cost and q is the quantity produced. What is the minimum price necessary for this firm to produce any output in the short run?
If TC=100+15q, then the minimum price necessary for this firm to produce any output in the short-run is P=AVC, AVC=(TC-FC)/q, so P=AVC=15q/q=15
Consider the total cost and total revenue given in the following table: quantity: 0, 1, 2, 3, 4, 5, 6, 7, total cost: $8, $9, $10, $11, $13, $19, $27, $37 total revenue: $0, $8, $16, $24, $32, $40, $48, $56 Calculate marginal revenue and marginal cost for each quantity. (Hint: Put the points between whole numbers. For example, the marginal cost between 2 and 3 should be graphed at 2.5.) At what quantity do these curves cross?
MR: 0, 8, 8, 8, 8, 8, 8, 8 MC: 1, 1, 1, 2, 6, 8, 10 profit maximizing point at 6 because there MC equals MR
A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200. what is marginal cost?
Marginal Cost: 10
Under what condition will a firm exit a market? Explain.
a firm will exit the market if the revenue it would get from producing is less than its total cost
Under the conditions will a firm shut down temporarily? Explain.
a firm will temporarily shut down if the revenue that it would get from producing is less than the variable cost of production (MR<VC)
What is meant by competitive firm?
a firm without market power, with no ability to alter the market price of the goods it produces
You are the Chief Financial Officer for a firm that sells digital music players. Your firm has the following average total cost schedule: quantity: 600 players; 601 players average total cost: $300; $301 Your current level of production is 600 devices, all of which have been sold. Someone calls, desperate to buy one of your music players. The caller offers you $550 for it. Should you accept the offer? Why or Why not?
at an output level of 600 players, total cost is $180,000 (600*$300). The total cost of producing 601 players is $180,901. Therefore, you should not accept the offer of $550 , because the marginal cost of the 601st player is $901.
Which of these assumption is often realistic for s firm in the short run? a. the firm can vary both the size of its factory and the number of workers it employs b. the firm can vary the size of its factory, but not the number of workers it employs c. the firm can vary the number of workers it employs, but not the size of its factory d. the firm can vary neither the size of its factory not the number of workers it employs
c. the firm can vary the number of workers it employs, but not the size of its factory
Which of the following expressions is correct for a competitive firm? a. profit = total revenue - total cost b. marginal revenue = (change in total revenue)/(change in quantity of output) c. average revenue = total revenue/quantity of output d. all of the above are correct
d. all of the above are correct
Draw a production function that exhibits diminishing marginal product of labor. Draw the associated total-cost curve. (in both cases, be sure to label the axes.) Explain the shapes of the two curves you have drawn.
figure 4 shows a production function that exhibits diminishing marginal product of labor. figure 5 shows the associate total-cost curve. The production function is concave because of diminishing marginal product, while the total-cost curve is convex for the same reason.
Consider the following table of long-run total costs for three different firms: quantity: 1, 2, 3, 4, 5, 6, 7 Firm A: $60, $70, $80, $90, $100, $110, $120 Firm B: $11, $24, $39, $56, $75, $96, $119 Firm C: $21, $34, $49, $66, $85, $106, $129 Does each of these firms experience economies of scale or diseconomies of scale?
firm A has economies of scale because average total cost declines as output increases. Firm B has diseconomies of scale because average total cost rises as output rises. Firm C has economies of scale from one to three units of output and diseconomies of scale for levels of output beyond three units.
A cost that does not depend on the quantity produced is a __________.
fixed cost
You are thinking about setting up a lemonade stand. The stand itself cost $200. The ingredients for each cup of lemonade cost $0.50. What is your fixed cost of doing business? What is your variable cost per cup?
fixed cost = $200; variable cost = $0.50
Consider the following cost information for a pizzeria: quantity (dozens): 0; 1; 2; 3; 4; 5; 6 total cost: $300; $350; $390; $420; $450; $490; $540 variable cost: $0; $50; $90; $120; $150; $190; $240 What is the pizzeria's fixed cost?
fixed cost = $300
Firms that shut down in the short run still have to pay their
fixed costs
Total cost can be divided into two types of costs:
fixed costs and variable costs
Suppose that the U.S. textile industry is competitive, and there is no international trade in textiles. In long-run equilibrium, the price per unit of cloth is $30. Now suppose that textile producers in other countries are willing to sell large quantities of cloth in the United States for only $25 per unit. assuming that U.S. textile producers have large fixed costs, what is the short-run effect of these imports on the quantity produced by an individual producer? What is the short-run effect on profits?
for an individual producer, equilibrium is where the marginal cost curve meets the $30 horizontal line (marginal revenue). For the entire market, it is just the simple "x" of supply and demand. Price = $30 at the intersection of course in the short run, textile producers will continue to produce, but less (intersection of MC and horizontal $25 line). Profits decrease and are probably negative (depends on where you drew your ATC curve)
Analyze the two following situations for firms in competitive markets: suppose that MC = 4q, where MC is marginal cost. The perfectly competitive firm maximizes profits by producing 10 units of output. At what price does it sell these units?
if MC = 4q and the perfectly competitive firm maximizes profits by producing 10 units of output, then the profit maximizing price is P=4q=4*10=40
Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward, and the market for pretzels is in long-run competitive equilibrium. Suppose that the city decides to charge a fee for the 800 licenses, all of which are quickly sold. How will the size of the fee affect the number of pretzels sold by an individual stand? How will it affect the price of pretzels in the city?
if the city charges a license fee for the license, it will have no effect on marginal cost, so it will not affect the firms output. it will, however, reduce the firm's profits. as long as the firm is left with a zero or positive profit, it will continue to operate. Thus, as long as the market supply curve is unaffected, the price of pretzels will not change
Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward, and the market for pretzels is in long-run competitive equilibrium. The city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800. What effect will this action have on the market and on an individual stand that is still operating?
if the city government restricts the number of pretzel stands to 800, the market supply curve shifts to S2. The market price rises to P2, and individual firms produce output q2. Market output is now 800*q2. Now the price exceeds average total cost, so each firm is making a positive profit. Without restrictions on the market, this would induce other firms to enter the market, but they cannot because the government had limited the number of licenses
An industry currently has 10 firms, all of which have fixed costs of $16 and average variable cost as follows: quantity: 1, 2, 3, 4, 5, 6 average variable cost: $1, $2, $3, $4, $5, $6 the price is currently $10. What is the total quantity supplied in the market?
if the price is $10, each will produce five units, so there will be 5*500 units supplied in the market
As a general rule, when accountants calculate profit they account for explicit costs but usually ignore
implicit costs
When a factory is operating in the short run
it cannot adjust the quantity of fixed inputs
A firm that shuts down temporarily has to pay
its fixed costs but not its variable costs
Are market supply curves typically more elastic in the short run or in the long run? Explain.
market supply curves are typically more elastic in the long run because number of firms adjust to satisfy quantity demanded at price
In a competitive market,
no single buyer or seller can influence the price of the product.
Consider the total cost and total revenue given in the following table: quantity: 0, 1, 2, 3, 4, 5, 6, 7, total cost: $8, $9, $10, $11, $13, $19, $27, $37 total revenue: $0, $8, $16, $24, $32, $40, $48, $56 Can you tell whether this firm is in a competitive industry? if so, can you tell whether the industry is in long-run equilibrium?
the firm is in a competitive industry because price stays the same (horizontal) at any quantity produced > not in a long run equilibrium because price exceeds average total cost
Ball Bearings Inc. faces costs of production as follows: quantity: 0, 1, 2, 3, 4, 5, 6 total fixed costs: $100, $100, $100, $100, $100, $100, $100 total variable costs: $0, $50, $70, $90, $140, $200, $360 The price of a case of ball bearings is $50. Seeing that she can't make a profit, the Chief Executive officer decides to shut down operations. What are the firm's profits/losses. Was this a wise decision? Explain.
the firm's losses are the $100 of fixed costs that it incurs whether or not it is producing anything. this was not a wise decision, as if the firm were producing 3 or 4 cases, it would only lose $40 (revenue would exceed fixed costs and cover some of the variable costs).
Does a firm's price equal the minimum of average total cost in the short run, in the long run, or both? Explain.
the firm's price equals the minimum of average total cost only in the long run. In the short run, price maybe greater than average total cost, in which case the firm is making profits, or price maybe less than average total cost, in which case the firm is making losses, or price maybe equal to average total cost in which case the firm is breaking even. but the situation is different in the long run. if firms are making profits, other firms will enter the industry, which will lower the price of the good and price will be equal to the minimum of average total cost. if firms are making losses, they will exit the industry, which will raise the price of the good. Entry or exit continues until firms are making neither profits nor losses. At that point, price equals average total cost
Ball Bearings Inc. faces costs of production as follows: quantity: 0, 1, 2, 3, 4, 5, 6 total fixed costs: $100, $100, $100, $100, $100, $100, $100 total variable costs: $0, $50, $70, $90, $140, $200, $360 Vaguely remembering his introductory economics course, The Chief Financial Officer tells the CEO it is better to produce 1 case of ball bearing, because marginal revenue equals marginal cost at that quantity, What are the firm's profits/losses at that level of production? Was this the best decision?
the fixed cost, AVC, ATC, and MC, profit or loss of the firm if they shut down, profit or loss of the firm if they continue to produce
Define total cost, average total cost, and marginal cost. How are they related?
total cost consists of the cost of all inputs needed to produce a given quantity of output. It includes fixed costs & variable costs. Average total cost is the cost of a typical unit of output & is equal to total cost divided by the quantity produced. Marginal cost is the cost of producing an additional unit of output & is equal to the change in total cost divided by the change in quantity. An additional relation between average total cost & marginal cost is that whenever marginal cost is less than average total cost, average total cost is declining; whenever marginal cost is greater than average total cost, average total cost is rising
You are thinking about setting up a lemonade stand. The stand itself cost $200. The ingredients for each cup of lemonade cost $0.50. Construct a table showing your total cost, average total cost, and marginal cost for output levels varying from 0 to 10 gallons. (Hint: There are 16 cups in a gallon.)
total cost: $200; $208; $216; $224; $232; $240; $248; $256; $264; $272; $280 ATC: --; 13; 6.75; 4.67; 3.63; 3; 2.58; 2.29; 2.06; 1.89; 1.75 MC: --; .5; .5; .5; .5; .5; .5; .5; .5; .5; .5
Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus's output in a given day. A work costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in the column for total cost.
total cost: $200; $300; $400; $500; $600; $700, $800; $900
A firm has fixed cost of $100 and average variable cost of $5 * Q, where Q is the number of units produced. Construct a table showing total cost for Q from 0 to 10.
total cost: 105; 110; 115; 120; 125; 130; 135; 140; 145; 150