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Unformatted text preview: 174 Part 2 Microeconomics: Consumers and Firms .5
,4 7. Proﬁt-maximizing level of output for all 1. TC = TFC + TVC 4. AVG = TVC/q ﬁrms- MR = MC
2' AFC = TFC/q 5' ATC = TC/q = AFC + AVC 8. Proﬁt-maximizing level of output for
3. Slope of TVC = MC 6. TR = P X q perfectly competitive ﬁrms: P = MC Fawl 9 How<vJ°'/L‘ I 3/ 7 ‘2 I a C 101)
3 PROBLEM SET 1. Consider the following costs of owning and operating a car. A
$15,000 Ford Taurus ﬁnanced over 5 years at 10 percent interest means a monthly payment 0f $3 18'71‘ Insurance COS“ $100 a 4. Do you agree or disagree with each of the following statements?
month regardless of how much you drive. The car gets 20 miles Explain your reasons. per gallon and uses unleaded regular that costs $1.50 per gallon. a_ For a competitive ﬁrm facing a market price above average Fmally suPpose that wear and tear on the ‘3“ C05“ a§°ut 15 total cost, the existence of economic proﬁts means the ﬁrm
cents a mile. Wthh costs are ﬁxed and Wthh are variable? What Should increase output in the short run even if Price is below is the marginal cost of a mile driven? In deciding whether to marginal cost.
drive from New York to PlttSburgh (abom 1’000 mlles mund' . If marginal cost is rising with increasing output, average cost e. If output price was $57, how many units of output would the
ﬁrm produce? Explain. trip) to visit a boyfriend, which costs would you consider? Why? . You are given the following cost data. Assume that you cannot produce fractions of a unit. must also be rising.
. Fixed cost is constant at every level of output except zero.
When a ﬁrm produces no output, ﬁxed costs are zero in the Q TFC TVC short run. 12 0
12 38 A ﬁrm’s cost curves are given by the following table: TC TFC TVC ATC MC $100 $100
390 100 AVC 05" If the price of output is $7, how many units of output will this
ﬁrm produce? What is total revenue? What is total cost? Will the
ﬁrm operate or shut down in the short run, or in the long run?
Brieﬂy explain. OOWVOUIQWNi—IO The following table gives capital and labor requirements for 10
different levels of production: ._‘ . Complete the table.
. Graph AVC, ATC, and MC on the same graph. What is the
relationship between the MC curve and ATC, and between
MC and AVC?
. Suppose that market price is $30. How much will the ﬁrm
12 produce in the short run? How much are total proﬁts?
15 . Suppose that market price is $50. How much will the ﬁrm
19 produce in the short run? What are total proﬁts?
24 . Suppose that market price is $10. How much would the ﬁrm
14 30 produce in the short run? What are total proﬁts?
20 54 v: . A 2001 Michigan graduate inherited her mother’s printing com—
pany. The capital stock of the ﬁrm consists of three machines of
various vintages, all in excellent condition. All machines can be
running at the same time: \DOOVOU‘ubUJNb—‘O ._a
O . Assuming that the price of labor (PL) is $5 per unit and the
price of capital (PK) is $10 per unit, compute and graph the
total variable cost curve, the marginal cost curve, and the
average variable cost curve for the ﬁrm. . Do the curves have the shapes that you might expect? Explain. . Using the numbers here, explain the relationship between
marginal cost and average variable cost. . Using the numbers here, explain the meaning of “marginal Maximum Total
Printing and Capacity (Books)
Binding per Book per Month $1.00 100
3.00 500 Cost of Machine 1
Machine 3 cost” in terms of additional inputs needed to produce a mar-
ginal unit of output. a. Assume that “cost of printing and binding per book” includes
all labor and materials, including the owner’s own wages. iWEB EXERCISES 9-. ...................................................................... .. Assume further that Mom signed a long-term contract (50
years) with a service company to keep the machines in good
repair for a ﬁxed fee of $100 per month.
(1) Derive the ﬁrm’s marginal cost curve.
(2) Derive the ﬁrm’s total cost curve. b. At a price of $2.50, how many books would the company
produce? What would total revenues, total costs, and total
proﬁts be? 7. The following curve is a production function for a ﬁrm that uses
just one variable factor of production, labor. It shows total out-
put, or product, for every level of inputs: a. Derive and graph the marginal product curve. b. Suppose that the wage rate is $4. Derive and graph the ﬁrm’s
marginal cost curve. c. If output sells for $6, what is the proﬁt-maximizing level of
output? How much labor will the ﬁrm hire? Total product Total output 0 100 200 300 Units of labor 8. Elena and Emmanuel live on the Black Sea in Bulgaria and own
a small ﬁshing boat. A crew of four is required to take the boat
out ﬁshing. The current wage paid to the four crew members is a
total of 5,0001evs per day (a lev is the Bulgarian unit of cur-
rency). Assume that the cost of operating and maintaining the
boat is 1,0001evs per day when ﬁshing, and zero otherwise. The
following schedule gives the appropriate catch for each period
during the year: Catch Per Day
Prime ﬁshing: 180 days 100
Month 7: 30 days 80
Month 8: 30 days 60
Rest of the year 40 The price of ﬁsh in Bulgaria is no longer regulated by the gov- ernment, and is now determined in competitive markets. Suppose that the price has been stable all year at 80 levs per kilo- gram. a. What is the marginal product of a day’s worth of ﬁshing dur-
ing prime ﬁshing season? During month 7? During month 8? 1. Suppose you live in San Francisco and are planning a business
trip to Chicago. As you are making your reservation you have an
idea. How much would it cost to visit your old college room—
mate in Columbus, Ohio? Go to http://www.yahoo.com and
click on “Travel” and again on “Air.” Price out a round-trip ticket
from San Francisco (SEC) to Chicago (0RD) more than a
month in advance with a Saturday night stay over. Next, go back Chapter 7 Short-Run Costs and Output Decisions 175 b. What is the marginal cost of a kilogram of ﬁsh during prime
ﬁshing season? During month 7, during month 8, and during
the rest of the year? c. If you were Elena and Emmanuel, how many months per
year would you hire the crew and go out ﬁshing? Explain
your answer using marginal logic. For each of the following businesses, what is the likely ﬁxed fac-
tor of production that deﬁnes the short run?
a. Potato farm of 160 acres
b. Chinese restaurant
c. Dentist in private practice
d. Car dealership
e. Bank 10. A producer of hard disk drives for notebook computers cur—
rently has a factory with two disk—pressing machines, which it
cannot change in the short run. Each of the machines costs $100
per day (the opportunity cost of the funds used to buy them).
Each hired worker costs $50 per day. The relationship between
output and the number of workers is as follows: TF C TVC TC AFC AVC ATC MC 0
1.. llll llllllll b—lb-ID—I
48 llllllll \IO‘lelphUJNv—IO
N a. Fill in the columns for total ﬁxed cost (TFC ), total variable
cost (TVC), total cost (TC), average ﬁxed cost (AFC), average
variable cost (AVC), average total cost (ATC ), and marginal
cost (MC). b. Verify that the two alternative methods of ﬁguring ATC
(TC/q and AVC + AFC) give the same answer (except for
rounding). c. Over what range of output are there decreasing marginal
costs, increasing marginal costs, increasing returns to labor,
and diminishing returns to labor? d. At which level of output is AVC minimized? At which level is
ATC minimized? e. Suppose this ﬁrm operates in a perfectly competitive output
market and can sell as many disk drives as it wants for $410
each. In the short run, what is the proﬁt-maximizing level of
output for this ﬁrm? f. Does the proﬁt-maximizing output level you found in e.
minimize average total costs? If not, how could the rm be
maximizing proﬁts if it is not minimizing costs? and click on multi-city and price out a ticket. from San Francisco
to Chicago on to Columbus (CMH) and back to San Francisco,
spending three days in Columbus. What is the marginal cost of
visiting your friend in Columbus? 2. Have you ever wondered how much it would cost to own your
own McDonald’s restaurant? Imagine that you are thinking of £1,
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This note was uploaded on 06/20/2008 for the course EC 201 taught by Professor Xasdf during the Summer '08 term at N.C. State.
- Summer '08