Name: ________________________ Class: ___________________ Date: __________ ID: A Short run costs Essay 1. Jake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year. He pays his farm hands $128,000 a year. Is his rent a fixed cost or a variable cost? Are the wages he pays his workers a fixed cost or a variable cost? Briefly explain your answers. 2. "In the short run, even when output is zero, the firm still has some variable costs it must pay." Is the statement correct or incorrect? Briefly explain your answer. 3. When plotted against the total output, what does the total fixed cost curve look like? 4. Downsizing is the practice of laying off workers in an attempt to decrease average total cost. Can laying off workers decrease average total cost? Is it possible for the firm to downsize and have its average total cost increase? Explain your answer. 5. How do we calculate average fixed cost and why does average fixed cost fall as output increases? 6. The average total cost curve is U-shaped. At the quantity of output where average total cost is at its minimum, is the marginal cost curve above the average total cost curve, below the average total cost curve, or intersecting the average total cost curve? 7. Which average cost curves are U-shaped? 8. What is the relationship between the marginal product of labor and the marginal cost? 9. Explain how new technologies, which increase productivity, affect the average variable cost, average total cost, and marginal cost curves. 10. When the Rent-A-Limo Company negotiates its new labor contract it finds that the wages it must pay drivers have increased. How does this wage hike affect the Rent-A-Limo Company's average fixed cost, average variable cost, average total cost, and marginal cost? 1 Name: ________________________ ID: A 11. The table above has the total product schedule for an imaginary good called a widget. Each unit of labor costs $25 and the total cost of capital is $100. a. Use this information to complete the table. In the table, TFC is the total fixed cost, TVC is the total variable cost, TC is the total cost, AFC is the average fixed cost, AVC is the average variable cost, ATC is the average total cost, and MC is the marginal cost. b. Suppose that labor becomes twice as expensive (so that one unit of labor now costs $50) but nothing else changes. Complete the above table with the new cost schedules. If you plotted the cost curves, how would the increased wage rate affect the cost curves? 12. This month, the local widget factory produced 100 widgets. The total variable cost of production was $500 and the average total cost of production was $8. a. What is the total cost? b. What is the total fixed cost? c. What is the average fixed cost? d. What is the average variable cost? 2 Name: ________________________ ID: A 13. Acme produces rocket shoes for use by slow coyotes. Acme's total cost schedule is given in the table above. Acme's total fixed cost is $12. Complete the table. (In the table, TFC is the total fixed cost, TVC is the total variable cost, AFC is the average fixed cost, AVC is the average variable cost, and ATC is the average total cost.) 14. Rufus runs a skunk-skinning service in West Virginia. He employs skinners at a wage rate of $240 a week for each one. He leases the shack where his workers work for $200 per week. The rent is fixed for the next two years. Last week his 10 employees managed to skin a total of 300 skunks. a. What is the average product of labor for Rufus's company? b. What is Rufus' total variable cost per week? c. What is the average variable cost for Rufus's company? d. If Rufus adds his brother Jethro to his staff, at a wage rate of $240 a week, and his company can now skin 310 skunks per week, what is Rufus's new average variable cost? 15. The above table gives the total cost schedule for oil changes at the local Jiffy Lube. a. What is Jiffy Lube's total fixed cost? b. What is the total variable cost of 2 oil changes? c. What is the average variable cost of 4 oil changes? d. What is the average fixed cost of 2 oil changes? e. What is the marginal cost of the 3rd oil change? 3 Name: ________________________ ID: A 16. Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student added 50 newspapers to total output. The cost of the capital the firm uses is fixed at $50 per shift. a. Is the newspaper operating in the long run or short run? Why? b. What is the average product of 5 students? c. Calculate the total fixed, total variable, and total costs of folding and bagging 300 newspapers. d. Calculate the average fixed, average variable, and average total costs of folding and bagging 300 newspapers. e. What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth student? 17. Draw an average total cost curve, an average variable cost, and a marginal cost curve all on the same graph. Make sure to correctly label the axes. What relationship must exist between the marginal cost curve and the average total cost and average variable cost curves? 4