Chapter 13 Post-Class Assignment Part II: The Costs of Production

Suppose Ike's Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is ?? per bike. Suppose Ike's Bikes is expecting to produce 600 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using ??? .

$720 three factories

Jake lives in Philadelphia and runs a business that sells boats. In an average year, he receives $723,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Jake does not operate this boat business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this boat business. Complete the following table by determining Jake's accounting and economic profit of his boat business.

Accounting Profit= $33,000 Economic Profit= $11,000

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production.

More than 400 bikes per month= Diseconomies of Scale Fewer than 300 bikes per month= Economies of Scale Between 300 and 400 bikes per month= Constant Returns to Scale

Identify each of Jake's costs in the following table as either an implicit cost or an explicit cost of selling boats.

The wages and utility bills that Jake pays = Explicit Cost The rental income Jake could receive if he chose to rent out his showroom= Implicit The wholesale cost for the boats that Jake pays the manufacturer= Explicit Cost The salary Jake could earn if he worked as a financial advisor= Implicit Cost

True or False: The shape of the production function reflects the law of diminishing marginal returns.

True

You can think of the result in any one game as being Charles's marginal free-throw percentage. Based on your previous answer, you can deduce that when Charles's marginal free-throw percentage is below the average, the average must be .

falling

You can now apply this analysis to production costs. For a U-shaped average total cost (ATC) curve, when the marginal cost curve is below the average total cost curve, the average total cost must be . Also, when the marginal cost curve is above the average total cost curve, the average total cost must be . Therefore, the marginal cost curve intersects the average total cost curve .

falling, rising, & at its minimum

Kevin's Performance Pizza is a small restaurant in Philadelphia that sells gluten-free pizzas. Kevin's very tiny kitchen has barely enough room for the two ovens in which his workers bake the pizzas. Kevin signed a lease obligating him to pay the rent for the two ovens for the next year. Because of this, and because Kevin's kitchen cannot fit more than two ovens, Kevin cannot change the number of ovens he uses in his production of pizzas in the short run. However, Kevin's decision regarding how many workers to use can vary from week to week because his workers tend to be students. Each Monday, Kevin lets them know how many workers he needs for each day of the week. In the short run, these workers are inputs, and the ovens are inputs.

variable & fixed