E112 Lab “Costs of Production” 1. Anna is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent a location and buy the stock. In addition, she would have to quit her $50,000 per year job as accountant. What is Anna’s opportunity cost of running a hardware store for a year? If Anna thought she would sell $510,000 worth of merchandise in a year, should she open the store? Explain. 2. Robert runs a small firm which makes pottery. He hires one helper at $12 000 a year, pays annual rent of $5 000 for his shop, and materials cost $20 000 per year. Robert has $40 000 of his own funds invested in equipment (pottery, wheels and so forth) which could earn him $ 4 000 per year if alternatively invested. Robert has been offered $15000 to work as a potter for competitor. He estimates his talents of entrepreneur to be worth $3000 per year. Total annual revenue from pottery sales is $72000. What if total revenue is 85 000? 109 000? Calculate accounting and economic profit for the pottery for each of the cases. 3. Use the following information to find a marginal product of labor and determine the production process. # of workers 0 1 2 3 Output 0 23 40 50 Marginal product of labor 4. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught: Hours Quantity of fish caught 0 0 1 10 2 18 3 24 4 28 5 30 a. What is the marginal product of each hour spent fishing? b. Use this data to graph the fisherman’s production function. Explain its shape. c. The fisherman has fixed cost of $10 (his pole). The opportunity cost of his time is $5 per hour. Graph the fisherman’s total cost curve. Explain its shape. 5. Which of the following are short run and which are long run adjustments? a. Texaco builds a new oil refinery b. Acme Steel Corporation hires 200 more workers c. A farmer increases the amount of fertilizer used on his corn crop d. An Alcoa plant adds a third shift of workers 5. Why can the distinction between fixed and variable cost be made in the short run? Classify the following as fixed or variable cost: advertising expenditures, fuel, shipping charges, payments for raw materials, real estate taxes, executive salaries, wage payments, rental payments on leased office machinery. 6. “There are no fixed costs in the long run; all costs are variable.” Explain. 7. List the fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1000 miles to Miami for spring break. Which costs fixed, variable or both – would you take into account in making your decision? Would any implicit cost be relevant? Explain.
