ANSWERS TO CHAPTER CHECKPOINT EXERCISES
1a. Joe’s explicit costs are $2,000 rent he pays the airport and $200 in interest he
pays on his credit card. So Joe’s total explicit costs are $2,200.
1b. Joe’s implicit costs are $10,000 of normal profit for running a shoeshine
stand and $500 depreciation for his capital equipment, the chair, polishes,
and brushes. So Joe’s total implicit costs are $10,500.
1c. Joe’s economic profit equals his total revenue minus his total opportunity
costs. Joe’s total revenue is $15,000. His total opportunity costs are the sum
of his explicit costs, $2,200, and his implicit costs, $10,500. Joe’s total
opportunity costs are $12,700 so his economic profit is $15,000 minus
$12,700, which is $2,300.
2a. Sonya’s explicit costs are $10,000 for cards, $5,000 for rent, and $1,000 for
utilities. So Sonya’s explicit costs are $16,000.
2b. Sonya’s implicit costs are $25,000 in forgone income as a real estate agent,
$14,000 normal profit, $60 in forgone interest, and $400 in economic
depreciation on the cash register, for a total of $39,460.
2c. Sonya’s economic profit equals her total revenue, $58,000, minus her total
opportunity costs or $55,640, which is the sum of her explicit and implicit
costs. Sonya’s economic profit is
Total
Average
Marginal
$58,000  $55,640, which equals
Labor
product
product
product
$2,360.
0
0
xx
20
3a. The marginal product and average
1
20
20.0
product schedules are in the table to
24
the right.
2
44
22.0
16
3
60
20.0
12
4
72
18.0
8
5
80
16.0
4
6
84
14.0
2
7
86
12.3
3b. Marginal returns increase for the first 2 workers.
3c. Marginal returns decrease after the second worker is hired.
4a. The table to the right has Yolanda’s
total product, marginal product, and
average product schedules.
4b. Marginal returns increase for the 2nd
and 3rd workers.
4c. After the third worker is hired,
marginal returns decrease.
5a. The variable costs are the
costs of labor; the fixed costs
are the costs of the shaping
board equipment. Assuming
a 5-day work week, the total
cost schedules per day are in
the table to right.
Labor
0
Total
product
0
Average
product
xx
1
1,000
1,000
2
2,000
1,000
3
4,000
1,333
4
5,000
1,250
Marginal
product
1,000
1,000
2,000
1,000
Total
Total
Total
Total
product
fixed cost variable cost cost
Labor (body boards) (dollars)
(dollars) (dollars)
0
0
60
0
60
1
20
60
200
260
2
44
60
400
460
3
60
60
600
660
4
72
60
800
860
5
80
60
1,000
1,060
6
84
60
1,200
1,260
7
86
60
1,4000
1,460
5b. Total cost minus total variable cost always equals $60. The difference
between total cost and total variable cost equals total fixed cost, which does
not change with the
Total
Average
Average
level of output.
product
fixed
cost
variable
cost
5c. The average cost
Labor (body boards) (dollars)
(dollars)
schedules are in the
0
0
xx
xx
table to the right.
1
20
3.00
10.00
2
3
4
5
6
7
44
60
72
80
84
86
1.36
1.00
.83
.75
.71
.70
9.09
10.00
11.11
12.50
14.29
16.28
Average
total cost
(dollars)
xx
13.00
10.45
11.00
11.94
13.25
15.00
16.98
Total
Marginal
5d. The marginal cost schedule is in the table to the right.
Labor
product
cost
5e. Len’s average total cost is at a minimum between 44
0
0
and 60 body boards a day.
10.00
5f. Len’s average variable cost is at a minimum between
1
20
8.33
44 and 60 body boards a day.
2
44
5g. Though the range of output over which the minimum
12.50
average total cost and average variable cost occur is
3
60
16.67
the same, we know that the average variable cost
4
72
equals its minimum at a lower level of output than
25.00
the average total cost. The average total cost equals
5
80
50.00
the average variable cost plus the average fixed cost.
6
84
The average fixed cost constantly falls as output
100.00
increases. So as output increases after the average
7
86
variable cost reaches a minimum and starts to rise,
the average total cost continues to fall for a while
because the average fixed cost falls and this fall dominates the rise in the
average variable cost. Eventually the rise in the average variable cost is
greater than the fall in the average fixed cost and at that level of output, the
average total cost begins to rise as output increases.
6a. The variable costs are the
Total
Total
Total
costs of labor; the fixed costs
Labor
Output fixed cost variable cost
cost
are the costs of the
0
0
1,000
0
1,000
1
1,000
1,000
500
1,500
equipment. The total cost
2
2,000
1,000
1,000
2,000
schedules are in the table to
3
4,000
1,000
1,500
2,500
right.
4
5,000
1,000
2,000
3,000
6b. Total cost minus total
variable cost always equals
$1,000. The difference between total cost and total variable cost equals total
fixed cost, which does not change with the level of output.
6c. The
average
cost
Average
Average
Average
schedules are in the table
Labor
Output fixed cost variable cost total cost
to the right.
0
0
xx
xx
xx
1
1,000
1.00
.50
1.50
2
2,000
.50
.50
1.00
3
4,000
.25
.38
.63
4
5,000
.20
.40
.60
6d. The marginal cost schedule is in the table to the right.
Marginal
6e. From the numbers in the average cost table,
Labor
Output
cost
Yolanda’s average total cost is at a minimum when
0
0
.50
she produces 5,000 bullfrogs a week.
1
1,000
6f. Yolanda’s average variable cost is at a minimum
.50
when she produces 4,000 bullfrogs a week.
2
2,000
.25
6g. Average total cost equals average variable cost plus
3
4,000
.50
average fixed cost. Average fixed cost constantly falls
5
5,000
as output increases. So as output increases after
average variable cost reaches a minimum and starts
to rise, average total cost continues to fall for a while
because average fixed cost falls and this fall dominates the rise in average
variable cost. Eventually, the rise in average variable cost is greater than the
fall in average fixed cost and at that level of output, average total cost
begins to rise as output increases.
7.
The completed table
L
TP
TVC
TC
AFC
AVC
ATC
MC
is to the right.
0
0
0
100
xx
xx
xx
13.50
1
10
35
135
10.00
3.50
13.50
2.50
2
24
70
170
4.17
2.91
7.08
2.50
3
38
105
205
2.63
2.76
5.39
5.83
4
44
140
240
2.27
3.18
5.45
11.67
5
47
175
275
2.13
3.72
5.85
8.
9.
A = $1,050. Calculate A using TVC = TC  TFC. Total cost is given in the
row. For total fixed cost, TFC, note that TFC = TC  TVC. Use the
information in the top row to get TFC = $500. So A = $1,550  $500, which
equals $1,050.
B = $1,200. Calculate B by adding TVC + TFC, with TFC from part (a) as
$500. Then B = $700 + $500, which equals $1,200.
C = $5. Calculate C by calculating TFC  TP, which is $500  100 = $5.
D = $8.50. Calculate D by calculating TC  TP, which is $850  100= $8.50.
E = $2.50. Calculate E as the change in TC divided by the change in TP,
which is ($1,550  $1,200)  (380  240) = $2.50.
The long-run average cost curve, LRAC, shows the lowest average total
cost of producing any level of output when the firm has had sufficient
time to change both its plant size and labor employed. To construct the
LRAC curve, calculate the ATC curve for each plant size. The ATC that is
the lowest for each level of output is the LRAC for that level of output.
10.
A firm that is producing at the lowest
average cost might be able to lower its
average cost further by increasing its
production. Figure 12.1 shows an example. If
the firm is producing at point A, the firm can
increase its production by hiring more labor
and increasing the size of its plant and move
to point B. At point B the average cost is
lower than at point A. Between point A and
point B, the firm enjoys economies of scale.