Mr. Maurer
AP Economics
Name: ________________________
Chapter 9 – The Costs of Production
Short-Run Production Costs (p. 196 – 208)
All of the questions in this section refer to Happy Guy’s lawn service. The lawn service owner, Guy,
uses a pick-up truck, a trailer, and several pieces of equipment to operate the business. He owns the
mowers, and other equipment outright, but he pays $450/month on the pick-up and $150/month on the
trailer (that’s $15/day and $5/day). He also rents a garage to store his equipment for $600/month (that’s
$20/day). He currently has one employee at a cost of $100/day (he doesn’t work as a laborer himself).
He can hire as many workers as he would like at that rate.
Review from p. 196 - 202
1. What are Guy’s explicit costs for running the business? List the actual cost in dollars where you can,
but list other explicit costs that Guy has also (ones for which you weren’t given the actual dollar
amounts). Think of as many as you can.
2. What are Guy’s implicit costs for running the business? You probably can’t put a dollar value on
these, but you can identify them.
3. In this case, would an economist say that Guy is entitled to a “normal profit?” Explain what that
means.
4. How much money would Guy have to make in order to make an economic profit? You can’t answer
in a specific dollar amount, so describe the concept.
5. As Guy adds more workers, what can we expect to happen to the number of lawns he is able to cut
each week?
6. Complete the table below for Happy Guy’s Lawn Service (for simplicity, you are going to assume
that the only variable input Guy’s has is labor):
Number of Workers
# of Lawns Cut
per Day (Total
Product)
Marginal
Product
(MP)
Average Product
(AP)
0
1
2
3
4
5
6
7
0
3
8
15
20
23
25
21
X
X
7. Graph total product on the first graph below. Graph marginal product and average product on the
second graph. Remember to graph marginal product between the numbers on the horizontal axis. For
example, (0.5,3) for the first one. Identify the areas of increasing marginal returns, diminishing
marginal returns, and negative marginal returns on your graphs.
8. Now let’s look at Happy Guy’s costs. We are not going to try to calculate Guy’s implicit costs for
this example, so use only the explicit costs you were given at the beginning. Assume that labor is the
only variable input Happy Guy’s uses. Costs should be entered on a per day basis.
Total
Total
Total
Total Cost Average
Average
Average
Marginal
Product
Fixed
Variable
(TC)
Fixed
Variable Total Cost Cost (MC)
(TP)
Cost
Cost
Cost
Cost
(ATC)
(Lawns)
(TFC)
(TVC)
(AFC)
(AVC)
0
3
8
X
X
X
X
X
15
20
23
25
9. Plot Total Fixed Cost (TFC), Total Variable Cost (TVC) and Total Cost (TC) on the graph below:
a. What happens to total fixed cost as quantity
increases?
b. What is the difference between total variable
cost and total cost?
Go on to the next page:
10. Graph Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC) and
Marginal Cost (MC) on the graph below. If you want to get it exactly right, graph Marginal Cost at the
midpoints on the X-axis. For example (1.5, 3) and not (3, 3):
11. What is the difference between Average Variable Cost (AVC) and Average Total Cost (ATC)?
12. Why does Average Fixed Cost (AFC) decrease as quantity increases?
13. Why does marginal cost decrease at first, and then increase as quantity increases?
14. Where does the marginal cost curve intersect the average variable cost curve and the average total
cost curve? Explain why.
15. And finally, in the space below, draw freehand a graph that includes a marginal cost curve, average
fixed cost curve, average variable cost curve, and average total cost curve. You don’t even need
numbers on the axes of the graph, but there are certain shapes you need to maintain for each curve and
certain relationships you need to maintain between the different curves. Make sure you draw curves that
maintain these shapes and relationships.