Microeconomics
Quiz 7
Costs of production
1. Ed is a freelance writer who could work for a newspaper at $25,000 a year but instead works for himself and reaps
$41,000 a year in sales. His only business expenses are $1,000 for writing materials and $12,000 for renting an office.
a. What is Ed’s accounting profit?
b.
What is Ed’s economic profit?
2. Which of the following is most likely to generate fixed cost for Joe's Garage?
a. the grease used to lubricate cars
b. the part-time labor employed to repair cars
c. the inventory of replacement parts
d. the electricity used to heat and light the garage
e. the garage space used to repair cars
3. Which of the following are possible for a firm in the short run?
a. Halting production
b. Hiring more workers
c. Building a factory
d. Putting idle machines to work
4. Adrian’s Premium Boxing Service subcontracts with a chocolate manufacturer to box premium chocolates for their mail
order catalogue business. She rents a small room for $100 a week in the downtown business district that serves as her
factory. She can hire workers for $300 a week per worker.
a. Fill in the blacks in the table below. You may use a calculator.
Number
of
Workers
0
1
2
3
4
5
Output (Boxes of
Average
Marginal
Cost of
Premium
Product of
Cost of Total Cost Average
Product of
Factory
Chocolates
Labor
Labor
(TC) Fixed
Labor
per Week
Produced per
(AP)
(TVC)
Cost
(MP)
(TFC)
Week)
(AFC)
0
33
63
78
89
95
Average
Variable
Cost
(AVC)
Average
Total Cost
(ATC=
AFC+AVC)
b. Does the production function described in the table exhibit diminishing marginal product of labor? Explain.
c. Average product is at a maximum when _____workers are hired
d. Per unit cost of production (average total cost) is at a minimum when _____workers are hired .
e. During the week of July 4th, Adrian doesn't hire workers and doesn’t box any chocolates. What are her total costs
during the week?
5. Davey produces 100 glasses of lemonade with average total cost of 50 cents per glass and average variable cost of 40
cents per glass.
a. What is Davey's total fixed cost?
b. Suppose he decides to increase his production to 120 glasses of lemonade for today, what is his total fixed cost
now?
6. When Burger king hires one worker, 15 customers can be served in an hour. When Burger King hires two workers, 40
customers can be served in an hour. What is the marginal product of the second worker?
7. “Too many cooks spoil the broth” implies that the marginal product of the last cook is:
a. Very low.
b. Zero.
c. Negative.
d. Can only tell that the average product is negative, can’t tell about the marginal product.
e. Can’t tell without tasting the broth.
8.
How does a large company (for example, Walmart) take advantage of economies of scale?
9. In 2003, Time Warner (owns CNN) and the Walt Disney company (owns ABC News) discussed merging their news
operations. After analyzing the situation, the companies decided that a combined news operation would have higher
average costs than either CNN or ABC News had separately. Use a long-run average cost curve to illustrate where on the
output scale each firm was before the merger, where the joint firm be after the merger, and why this merger did not take
place. What is a possible explanation for decreasing returns to scale?