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.
Cost of the truck and trailer ($600/month). Cost of renting garage ($600/month) Costs of labor
($100/day per worker). Cost of gasoline, oil, and other materials and parts needed for
maintenance and operation. Any garage space he rents.
2. What are Guy’s implicit costs for running the business? You probably can’t put a dollar value on
these, but list his implicit costs.
Money he could make working at another job. Money he could make for running another
business. Money he could make renting out his truck, trailer, and equipment.
3. In this case, would an economist say that Guy is entitled to a “normal profit?” Explain what that
means in this case.
Yes, Guy is entitled to be paid for running the business. This must be comparable to what he
could make running some other business of a similar size or it is not worth Guy’s time to run the
lawn service.
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.
Enough to cover his explicit costs and his implicit costs, including a normal profit. Any amount
over that would be economic profit.
5. As Guy adds more workers, what can we expect to happen to the number of lawns he is able to cut
each week?
His productivity will increase at first, and increase at an increasing rate. At some point, the rate
of increase will slow down until, eventually, his total productivity will actually go down with each
additional worker.
6. Complete the table below for Happy Guy’s Lawn Service (assume that the only variable input Guy’s
has is labor):
Number of Workers
(Including Guy)
# 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
3
5
7
5
3
2
-4
X
3
4
5
5
4.6
4.2
3
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.
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
40
40
40
0
100
200
40
140
240
X
13.33
5
X
33.33
25
X
46.67
30
X
33.33
20
15
20
23
25
40
40
40
40
300
400
500
600
340
440
540
640
2.67
2
1.75
1.6
20
20
21.74
24
22.67
22
23.5
25.6
14.29
20
33.33
50
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?
Nothing. It’s fixed.
b. What is the difference between
total variable cost and total cost?
It is always equal to total fixed 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)?
It is always Average Fixed Cost at every point on the curve.
12. Why does Average Fixed Cost (AFC) decrease as quantity increases?
Because you are spreading a constant fixed cost over a larger and larger quantity.
13. Why does marginal cost decrease at first, and then increase as quantity increases?
Because of the law of diminishing marginal returns. At first, marginal returns increase, but
eventually they begin to decrease, causing increased marginal cost.
14. Where does the marginal cost curve intersect the average variable cost curve and the average total
cost curve? Explain why.
It crosses both the AVC and the ATC curves at their minimum point. This is because, if marginal
cost is less than average cost, the average costs will be going down. Once marginal cost crosses the
AVC and ATC curves, then marginal cost is greater than average costs, which will pull average
costs up. Whenever MC is above AVC or ATC, they must be moving up.
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.
Or anything else that maintains these key characteristics of the curves.
1. AFC is always declining.
2. Distance between AVC and ATC is always = AFC.
3. ATC is always greater than AVC (by the amount of AFC).
4. MC always slopes down at first and then slopes up. It intersects AVC and ATC at their lowest
points.