Mr. Maurer
AP Economics
Name: ________________________
Chapter 22 – The Costs of Production
Short-Run Production Costs (p. 398 – 403)
All of the questions in this section refer to Happy Guy’s lawn service. The lawn service owner, Guy,
uses a pick-up truck, a trailer, and several pieces of equipment to operate the business. He owns the
mowers, and other equipment outright, but he pays $150/month on the pick-up and $50/month on the
trailer. He currently has one employee at a cost of $200/day (he doesn’t work as a laborer himself). He
can hire as many workers as he would like at that rate.
Review from p. 392 – 398
1. What are Guy’s explicit costs for running the business? List the actual cost in dollars where you can,
but list other explicit costs that Guy has also (ones for which you weren’t given the actual dollar
amounts). Think of as many as you can.
Cost of the truck and trailer ($200/month). Costs of labor ($200/day per worker). Cost of gasoline,
oil, and other materials and parts needed for maintenance and operation. Any garage space he
rents.
2. What are Guy’s implicit costs for running the business? You probably can’t put a dollar value on
these, but list his implicit costs.
Money he could make working at another job. Money he could make for running another
business. Money he could make renting out his truck, trailer, and equipment.
3. In this case, would an economist say that Guy is entitled to a “normal profit?” Explain what that
means in this case. Yes, Guy is entitled to be paid for running the business. This must be
comparable to what he could make running some other business of a similar size or it is not worth
Guy’s time to run the lawn service.
4. How much money would Guy have to make in order to make an economic profit? You can’t answer
in a specific dollar amount, so describe the concept.
Enough to cover his explicit costs and his implicit costs, including a normal profit. Any amount
over that would be economic profit.
5. As Guy adds more workers, what can we expect to happen to the number of lawns he is able to cut
each week?
His productivity will increase at first, and increase at an increasing rate. At some point, the rate
of increase will slow down until, eventually, his total productivity will actually go down with each
additional worker.
6. Complete the table below for Happy Guy’s Lawn Service (assume that the only variable input Guy’s
has is labor):
Number of Workers
(Including Guy)
# of Lawns Cut
per Day (Total
Product)
Marginal
Product
(MP)
Average Product
(AP)
0
1
2
3
4
5
6
7
0
3
8
15
20
23
25
21
X
3
5
7
5
3
2
-4
X
3
4
5
5
4.6
4.17
3
7. Graph total product on the first graph below. Graph marginal product and average product on the
second graph. Remember to graph marginal product between the numbers on the horizontal axis. For
example, (0.5,3) for the first one.
8. Now let’s look at Happy Guy’s costs. We are not going to try to calculate Guy’s implicit costs for
this example, so use only the explicit costs you were given at the beginning. Assume that labor is the
only variable input Happy Guy’s uses.
Total
Total
Total
Total Cost Average
Average
Average
Marginal
Product
Fixed
Variable
(TC)
Fixed
Variable Total Cost Cost (MC)
(TP)
Cost
Cost
Cost
Cost
(ATC)
(Lawns)
(TFC)
(TVC)
(AFC)
(AVC)
0
3
8
200
200
200
X
200
X
200
400
400
600
66.7
25
15
20
23
25
200
200
200
200
600
800
1000
1200
800
1000
1200
1400
13.3
10
8.7
8.3
X
66.7
50
X
133.3
75
X
66.7
40
40
40
43.5
48
53.3
50
52.2
56
28.6
40
66.7
100
9. Plot Total Fixed Cost (TFC), Total Variable Cost (TVC) and Total Cost (TC) on the graph below:
a. What happens to total fixed cost
as quantity increases?
It doesn’t change – it’s FIXED.
b. What is the difference between
total variable cost and total cost?
It is always total fixed cost, at
every point on the curve.
Go on to the next page:
10. Graph Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC) and
Marginal Cost (MC) on the graph below. If you want to get it exactly right, graph Marginal Cost at the
midpoints on the X-axis. For example (1.5, 3) and not (3, 3):
NOTE: My
marginal cost for
the quantity of 25
is too high. It
should be 100
instead of 200, so
the MC curve
should top out at
100, not like
shown at left.
11. What is the difference between Average Variable Cost (AVC) and Average Total Cost (ATC)?
It is always Average Fixed Cost at every point on the curve.
12. Why does Average Fixed Cost (AFC) decrease as quantity increases?
Because you are spreading a constant fixed cost over a larger and larger quantity.
13. Why does marginal cost decrease at first, and then increase as quantity increases?
Because of the law of marginal returns. At first, marginal returns increase, but eventually they
begin to decrease, causing increased marginal cost.
14. Where does the marginal cost curve intersect the average variable cost curve and the average total
cost curve? Explain why. It crosses both the AVC and the ATC curves at their minimum point.
This is because, if marginal cost is less than average cost, the average costs will be going down.
Once marginal cost crosses the AVC and ATC curves, then marginal cost is greater than average
costs, which will pull average cost up.
15. And finally, in the space below, draw freehand a graph that includes a marginal cost curve, average
fixed cost curve, average variable cost curve, and average total cost curve. You don’t even need
numbers on the axes of the graph, but there are certain shapes you need to maintain for each curve and
certain relationships you need to maintain between the different curves. Make sure you draw curves that
maintain these shapes and relationships.
Your curves should look like the curves on the previous page.