Problem Set #3
Question #1:
10 Points Total
Question #1
a. 4 Point Total
1 Points- Correct Marginal Utility for CDs
1 Points- Correct Marginal Utility for DVDs
1 Points- Correct Marginal Utility per $ for CDs
1 Points- Correct Marginal Utility per $ for DVDs
Question #1
b. 3 Point Total
1 Point- for identifying the correct utility
maximizing combination as 2 CDs and 4 DVDs
2 Points- ExplanationTo find the utility maximizing combination first
you must calculate per dollar (MU/P). (1 point)
You continue buying the good with the highest
marginal utility per dollar until you reach the
income constraint of $100. (1 point)
Question #1
c. 3 Point Total
1 Point- for identifying the correct utility
maximizing combination as 3 CDs and 5 DVDs
2 Points- ExplanationWith an additional $30 you should buy one more
CD and one more DVD. (1 point)
You continue buying the good with the highest
marginal utility per dollar until you reach the
income constraint of $130. (1 point)
Question #2:
Definitions and Real
World Examples
15 Points Total
A. Explicit and Implicit Costs
5 Point Total
1 Point- definition of explicit costs
(traditional out of pocket costs)
1 Point- Example showing explicit costs
(costs to a firm or a consumer)
1 Point- definition of implicit costs
(opportunity costs that a firm or person
must “pay” to themselves)
1 Point- Example showing implicit costs
(forgone wage, forgone time and effort)
1 Point- Clarity of examples
B. Law of Diminishing Marginal Returns
5 Point Total
2 Points- Definition (As additional inputs
(workers) are added to fixed resources,
the additional output generated by each
new input will eventually fall.
2 Points- Example showing that
MARGINAL PRODUCT (additional
output from each new worker) will
eventually fall
1 Point (Clarity)
C. Fixed, Variable, and Total Costs
5 Point Total
1 Point- definition of fixed costs (costs that
DO NOT change with the amount
produced)
1 Point- Example of a fixed costs/resource
1 Point- definition of variable costs (costs
that change with the amount produced)
1 Point- Example of a variable cost/resource
1 Point- Example showing that Total cost
equals fixed plus variable.
Question #3:
Productivity and Costs
10 Points Total
Question #3a:
Worksheet
5 points total
Graded for completion
Didn’t do it: Make it up
Common mistake: How to calculate
average product
_______TP_______
# of workers
Question #3b:
a. 5 points total
1 Point- Marginal product and Marginal cost are mirror images of
each other…OR…when MP goes up, MC goes down and when MP
goes down, MC goes up.
1 point- Must mention the LAW OF DIMINISHING MARGINAL
RETURNS.
2 Point- When the marginal product is increasing and workers are
productive, the marginal cost of the units they make are low. As
more workers are hired they produce less and less due to the law of
Diminishing Marginal Returns. The units made by unproductive
workers have a high marginal cost. Thus, MC increases as workers
produce less and less additional output.
1 Point- Used numerical examples to show that the marginal cost
of the output produced by a worker that is productive is less that
the marginal cost of a unit produced by an unproductive worker.
4. Cory’s Surfboard Inc.
20 Points Total
4.The Chart
5 Point Total
1 Point 1 Point
1 Point
1 Point 1 Point
Most often
wrong
4.
A:
Plotted
Graph
5 Point Total
1 point- Correctly labeled axis with numbers
1 point- Correctly plotted MC
1 point- Correctly plotted ATC
1 point- Correctly plotted AVC
1 point- Correctly plotted AFV
MC
Cost/Price
ATC
AVC
AFC
Quantity
5 Point Total
2 Points- Styrofoam, Cory’s MC, ATC, and AVC
curves would increase.
2 Points- Rent, AFC and ATC curves would
increase (not MC)
1 Point- Explanation of differences
Question #4B
MC1
Costs (dollars)
MC
ATC1
AVC1
ATC
AVC
AFC
Quantity
Question 4.C.
5 Point Total
3 point- Output = 7 surfboards
1 point- Explanation- Cory should produce where
MR=MC to maximize profits
1 point- $65.71 Profit per Unit
Explanation- Cory is selling each unit for $150 and
his cost for each surfboard is $84.29.
OR
Total Profit equals TR ($1050)- TC ($590)= $460
$460 divided by 7 equals $65.71
5b. Take Home FRQ
18 Points Total
FRQ #1
8 Point Total
Filling out the chart
1 Point 1 Point
1 Point 1 Point
FRQ #1
8 Point Total
a. 1 point- AVC=$17
b. 1 point- Output 7
1 point- Explanation- Firms
maximize profits by producing where
MR=MC. In this case, you would
continue to produce until the marginal
cost is as close to the marginal revenue
as possible without going over.
c. 1 point- $10 profit PER UNIT.
FRQ #2
10 Point Total
P
1 Point
S
P
1 Point
MC
ATC
$50
$50
D=MR
AVC
$35
D
Q
Industry
Q
100
Firm
Q
FRQ #2
Cost and Revenue
10 Point Total
MC
ATC
$50
MR=P
AVC
$35
Total Revenue = 1 Point
Total Cost = 1 Point
0
100
Shut Down
Point = 1 Point
FRQ #2
10 Point Total
b.i. 1 point- The firm IS
productively efficient because price
equals minimum ATC (producing at
the lowest cost)
b.ii. 1 point- The firm IS allocatively
efficient because price equals MC.
1 Point- Show demand increase in the industry leads
to a demand/price increase in the firm.
c.i. 1 point- Price increases.
c.ii. 1 point- Quantity increases.
P
P
S1
MC
ATC
50
50
MR
D2
D1
100
Firm
Q
Q
Industry
5a. In-Class FRQ
12 Points Total
5a. 2005 FRQ
P
S1
P
MC
ATC
P
P
D=MR
D1
q
Firm
Q
Q
Industry/Market
Q
5a. 2005 FRQ
P
S1
P
MC
ATC
P
P
D=MR
D1
q
Firm
Q
Q
Industry/Market
Q
5a. 2005 FRQ
P
S1
P
MC
ATC
P
P
D=MR
D1
q
Firm
Q
Q
Industry/Market
Q
5a. 2005 FRQ
P
S1
P
MC
ATC
P
P
D=MR
D1
q
Firm
Q
Q
Industry/Market
Q
5a. 2005 FRQ
Check that it is UP to ATC
5a. 2005 FRQ
Check that it is UP to ATC
5a. 2005 FRQ
Check that it is UP to ATC
5a. 2005 FRQ
Check that it is UP to ATC
5a. 2005 FRQ
5a. 2005 FRQ
5a. 2005 FRQ
5a. 2005 FRQ