Krugman_SolMan_CH08

# Krugman_SolMan_CH08 - Krugman_SolMan_CH08 4:01 PM Page 71...

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chapter 8 Behind the Supply Curve: Inputs and Costs 1. a. The fixed inputs are those whose quantities do not change as the quantity of out- put changes: frozen-yogurt machines, refrigerators, and the shop. The variable inputs are those whose quantities do change as the quantity of output changes: frozen-yogurt mix, cups, sprinkle toppings, and workers. b. The accompanying diagram illustrates the total product curve. c. The marginal product, MPL , of the first worker is 110 cups. The MPL of the sec- ond worker is 90 cups. The MPL of the third worker is 70 cups. The MPL of labor declines as more and more workers are added due to the principle of diminishing returns. Since the number of frozen-yogurt machines is fixed, as workers are added there are fewer and fewer machines for each worker to work with, making each additional worker less and less productive. 2. a. Marty’s variable cost, VC , is his wage cost (\$80 per worker per day) and his other input costs (\$0.50 per cup). His total cost, TC , is the sum of the variable cost and his fixed cost of \$100 per day. The answers are given in the accompanying table. TP 56 4 3 2 1 0 350 300 250 200 150 100 50 Quantity of frozen yogurt (cups) Quantity of labor (workers) 71 Quantity of frozen Quantity yogurt of labor (cups) (workers) VC TC MC of cup 0 0 \$0 \$100 \$1.23 110 1 1 × 80 + 110 × 0.5 = 135 235 1.39 200 2 2 × 80 + 200 × 0.5 = 260 360 1.64 270 3 3 × 80 + 270 × 0.5 = 375 475 3.17 300 4 4 × 80 + 300 × 0.5 = 470 570 4.50 320 5 5 × 80 + 320 × 0.5 = 560 660 8.50 330 6 6 × 80 + 330 × 0.5 = 645 745 Krugman_SolMan_CH08 11/11/04 4:01 PM Page 71

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b. The accompanying diagram shows the variable cost and total cost curves. c. Marginal cost, MC , per cup of frozen yogurt is shown in the table in part a; it is the change in total cost divided by the change in quantity of output. 3. a. The average fixed cost, average variable cost, and average total cost per cup of yogurt are given in the accompanying table. (Numbers are rounded.) TC VC 150 100 250 200 350 300 50 0 \$800 600 400 200 Cost Quantity of frozen yogurt (cups) 72 CHAPTER 8 BEHIND THE SUPPLY CURVE: INPUTS AND COSTS Quantity of frozen yogurt (cups) VC TC AFC of cup AVC of cup ATC of cup 0 \$0 \$100 110 135 235 \$0.91 \$1.23 \$2.14 200 260 360 0.50 1.30 1.80 270 375 475 0.37 1.39 1.76 300 470 570 0.33 1.57 1.90 320 560 660 0.31 1.75 2.06 330 645 745 0.30 1.95 2.26 The accompanying diagram shows the AFC , AVC , and ATC curves. c. AFC declines as output increases due to the spreading effect. The fixed cost is spread over more and more units of output as output increases. AVC increases as output increases due to the diminishing returns effect. Due to diminishing returns to labor, it costs more to produce each additional unit of output. 150 100 250 200 350 300 0 \$2.50 2.00 1.50 1.00 0.50 Cost of cup Quantity of frozen yogurt (cups) AFC Krugman_SolMan_CH08 11/11/04 4:01 PM Page 72
d. Average total cost is minimized when 270 cups of yogurt are produced. At lower quantities of output, the fall attributable to the spreading effect dominates changes in average total cost. At higher quantities of output, the rise attributable to the diminishing returns effect dominates changes in average total cost.

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