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1 The Colorado College Department of Economics and Business Block 5: Principles of Microeconomics Block 5 Econ 151 Midterm # 2 answers 1) (a) (i) Average cost is the total cost per unit of output, while the marginal cost is the change in total cost for producing one additional unit of output. Both curves are U- shaped. When MC falls, AC also falls and when MC rises, AC rises too. The MC curve intersects the AC curve at its minimum point. (ii) Accounting profit is defined as total revenue minus a firm’s explicit costs only, while economic profit is defined as a firm’s total revenue minus explicit and implicit costs. (b) AC of a firm is cost per unit of output. It is obtained as AC = TC/Q , where Q denotes output. A firm experiences economies of scale when the long-run AC declines with increase in output , while it experiences diseconomies of scale when the long-run AC increases with increase in output . Firm A Firm B Firm C Quantity TC ATC TC ATC TC ATC 1 60 60 11 11 21 21 2 70 35 24 12 34 17 3 80 26.7 39 13 49 16.3 4 90 22.5 56 14 66 16.5 5 100 20 75 15 85 17 6 110 18.3 96 16 106 17.7 7 120 17.1 119 17 129 18.4 As we see from the table above, firm A has economies of scale since ATC declines as output increases. Firm B has diseconomies of scale since ATC rises as output rises. Firm C has economies of scale of output from 1 to 3, then diseconomies of scale for greater levels of output. ATC Q Firm B ATC Q Firm A

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2 2) (a) (i) Since fixed cost is total cost minus total variable costs for each unit of output the fixed costs is \$300. (ii)
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