PS3_Sol - ECO1011 - Basic Microeconomics 2008 Fall Problem...

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1 ECO1011 - Basic Microeconomics 2008 Fall Problem Set 3 Due Date: Nov 18, 2008 (Tuesday) before 1pm 1. Exercise 1 of Chapter 7 in the textbook. (Joe’s economics and accounting cost) Answer: The accounting cost represents the actual expenses, which are $40,000+$0 + $25,000=$65,000. The economic cost includes accounting cost, but also takes into account opportunity cost. Therefore, economic will include, in addition to accounting cost, an extra $24,000 because Joe gave up $24,000 by not renting the building , and an extra $10,000 because he paid himself a salary $10,000 below market ($50,000-$40,000). Economic cost is then $99,000. 2. Exercise 2 of Chatper 7 in the textbook. (Filling in the table) Answer: (a) Units of Output Fixed Cost Variable Cost Total Cost Marginal Cost Average Fixed Cost Average Variable Cost Average Total Cost 0 100 0 100 -- -- 0 -- 1 100 25 125 25 100 25 125 2 100 45 145 20 50 22.5 72.5 3 100 57 157 12 33.3 19 52.3 4 100 77 177 20 25 19.25 44.25 5 100 102 202 25 20 20.4 40.4 6 100 136 236 34 16.67 22.67 39.3 7 100 170 270 34 14.3 24.3 38.6 8 100 226 326 56 12.5 28.25 40.75 9 100 298 398 72 11.1 33.1 44.2 10 100 390 490 92 10 39 49 (b) Average total cost is u-shaped and reaches a minimum at an output of 7, based on the above table. Average variable cost is u-shaped also and reaches a minimum at an output of 3. Notice from the table that average variable cost is always below average total cost. The difference between the two costs is the average fixed cost. Marginal cost is first diminishing, to a quantity of 3 based on the table, and then increases as q increases. Marginal cost should intersect average variable cost and average total cost at their respective minimum points, though this is not accurately reflected in the numbers in the table. If the specific functions had been given in the problem instead of just a series of numbers, then it would be possible to find the exact point of intersection between marginal and average total cost and marginal and average variable cost. The curves are likely to intersect at a quantity that is not a whole number, and hence are not listed in the above table. 3. With four fishing boats, you can only fish in two lakes: the Michigan, and the Ontario. The catch PER BOAT for the two lakes are: No. of boats Michigan Ontario 1 260 lb/boat 200 lb/boat 2 240 lb/boat 200 lb/boat 3 220 lb/boat 200 lb/boat 4 200 lb/boat 200 lb/boat
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2 With 2 boats to Michigan, and 2 boats to Ontario daily, you catch 240 lb/boat from Michigan, and 200 lb/boat from Ontario. Suppose your catch has no effect at all to the fish population, should you change your current allocation of boats? Answer: Your total output under the current allocation is 2x200+2x240 = 880 lb. Suppose, instead, you allocate (i) 1 boat to Ontario, and three boats to Michigan, the total output is 1x200+3x220 = 860 lb, (ii) 1 boat to Michigan, and three boats to Ontario, the total output is 1x260+3x200 = 860 lb. Both (i) and (ii) will strictly decrease the total output. Therefore the current allocation should not be
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This note was uploaded on 10/11/2009 for the course ECO eco1101 taught by Professor W during the Spring '09 term at American College of Gastroenterology.

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PS3_Sol - ECO1011 - Basic Microeconomics 2008 Fall Problem...

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