Name: _________________________________ Date: ____________ Period: ______
Microeconomics
Unit III: Costs of Production and Perfect Competition
Chapter 20: Cost of Production
Chapter 21: Pure Competition
1. Define the terms in your own words and use real world examples that clearly demonstrate your
understanding of each concept. Include formulas and graphs when necessary.
a. Explicit and Implicit Costs
b. Normal and Economic profit
c. Short Run and Long Run Plant Capacity
d. Total product, Marginal product, Average product and the Law of Diminishing Returns
e. Fixed Costs, Variable Costs, and Total Cost
f. Average Fixed Cost, Average Variable Costs, Average Total Costs and Marginal Costs
g. Economies of Scale and Diseconomies of Scale
2. Productivity and Costs
a. Complete the worksheet “Production Function for Tony’s Hat Store”
b. Complete worksheet titled “Cost and Competitive Market Supply”
3. Below is information regarding Cory’s Surfboard Inc. Complete the table and do the following
a. On a large graph, plot the MC, AFC, AVC, and ATC curves from this data.
b. EXPLAIN what would happen to each of Cory’s per unit cost curves if the price of Styrofoam
blanks (a variable input) increases. How would the cost curves change if there were an increase in
his rent (a fixed input)? Explain why the results are different.
c. If the market for surfboards was perfectly competitive and the market price was $150, how many
surfboards should Cory make and how much profit will he make for EACH surfboard? Draw the
firms demand on your graph in (a) Explain how you got your answer.
d. Label Productive efficiency and Allocative efficiency
Total
Variable
Total Cost Average Fixed
Average
Average Total
Marginal
Product
Costs
(TC)
Cost (AFC)
Variable Cost
Cost (ATC)
Cost (MC)
(TVC)
(AVC)
0
$0
$100
1
60
2
90
3
130
4
180
5
250
6
340
7
490
8
680
4. Perfectly Competitive Markets
a. Characteristics of Perfect Competition
b. Graphs with numbers and appropriate profits and losses calculated.
i. Industry and Firm in the short-run making a profit
ii. Industry and Firm in the short-run making a loss
iii. Industry and Firm in long-run equilibrium
iv. Explain and graph the firm’s short run decision to Shutdown
v. Explain and graph the firm’s long-run decision to exit or enter the market
5. Assume that apples are inferior goods. Draw a perfectly competitive industry for apples and a firm
selling apples in the long run equilibrium where price is $10 and the firm’s equilibrium quantity is 50.
Explain the following situations graphically and in words (side-by-side graphs needed for all).
a. EXPLAIN what happens in the short-run if incomes increase by 15%.
b. EXPLAIN the process by which this industry returns to the long-run equilibrium.