Homework 7
*Chapter 13
The Costs of Production
Page 260-262 Questions for
Review, Questions: 1-8
1. What is the relationship between a firm’s total revenue, total cost, and profit?
a. The relationship between a firm's total revenue, total, cost and profit are all
related. They all measure inflows. You need to know both the revenue and total
costs to calculate the profit.
2. Give an example of an opportunity cost that an accountant would not count as a cost.
Why would the accountant ignore this cost?
a. An example of an opportunity cost that an accountant would not count as a cost
is the amount of money they would have gained if they made a different decision
that yielded gains.
3. What is marginal product, and what is meant by diminishing marginal product?
a. The marginal product refers to the additional gain from selling one unit. The rule
of diminishing marginal product refers to the phenomenon of each additional unit
yielding less gain.
4. Draw a production function that exhibits a diminishing marginal product of labor. Draw
the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the
shapes of the two curves you have drawn.
a.
5. Define total cost, average total cost, and marginal cost. How are they related?
a. Total cost is the sum of both the variable cost and fixed costs of a firm. The
average total cost is the total cost divided by the quantity supplied. The marginal
cost is the cost of a single unit.
6. Draw the marginal-cost and average-total-cost curves for a typical firm.
7. How and why does a firm’s average-total-cost curve in the short run differ from its
average-total-cost curve in the long run?
a. The short and long run cost curves are different because in the long run firms
have more freedom to change inputs and outputs, and make bigger changes.
8. Define economies of scale and explain why they might arise. Define diseconomies of
scale and explain why they might arise.
a. Economies of scale are when an increase in output makes the marginal cost of
making one more smaller. This is because firms can get more for less in bulk.
Diseconomies of scale is when the opposite happens.
Problems and Applications
Questions: 1, 3, 9, 10
1. This chapter discusses many types of costs: opportunity cost, total cost, fixed cost,
variable cost, average total cost, and marginal cost. Fill in the type of cost that best
completes each sentence:
a. What you give up in taking some action is called the opportunity cost
b. Average cost is falling when marginal cost is below it and rising when marginal
cost is above it.
c. A cost that does not depend on the quantity produced is a(n) Fixed cost.
d. In the ice-cream industry in the short run, variable cost includes the cost of cream
and sugar but not the cost of the factory.
e. Profits equal total revenue minus Total cost.
f. The cost of producing an extra unit of output is the marginal cost.
3. A commercial fisherman notices the following relationship between hours spent fishing
and the quantity of fish caught
a. What is the marginal product of each hour spent fishing?
i.
0 - 10, 1 - 15, 2-20, 3-25, 4-30, 5-35
b. Use these data to graph the fisherman’s production function. Explain its shape.
i.
c. The fisherman has a fixed cost of (his pole). The opportunity cost of his time is
per hour. Graph the fisherman’s total-cost curve. Explain its shape.
i.
9. Jane’s Juice Bar has the following cost schedules:
a. Calculate average variable cost, average total cost, and marginal cost for each
quantity.
i.
AVC = 10/1=10
ii.
ATC = 40
iii.
MC - on the graph
b. Graph all three curves. What is the relationship between the marginal-cost curve
and the average-total-cost curve? Between the marginal-cost curve and the
average-variable-cost curve? Explain.
i.