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# PS7_S - METU Department of Economics Econ 101 Introduction...

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1 METU Department of Economics Econ 101: Introduction to Economics I Sections 01-02-03 2011-2012 Fall Semester Problem Set 7 with SOLUTIONS (Ch. 8 and Ch. 9 in Case et al.; and Relevant Parts of Ch. 8 in Lipsey et al.) PART A - QUESTIONS Q.1) Explain in your own words why the marginal cost curve is shaped the way it is (at first it decreases then it increases). The marginal cost curve first slopes downward due to increasing returns. This corresponds to the upward sloping portion of the marginal product curve. The marginal cost curve then slopes upward due to decreasing returns. This portion of the curve corresponds to the downward sloping portion of the marginal product curve. Q.2) When a firm produces 100 units of a good, its average total cost is 3 TL. When the firm produces 101 unist, its average total cost is 3.25 TL. What can you say about the marginal cost of producing the 101st unit? Explain. (You don’t have to give me the exact dollar amount of the marginal cost, but you can say something about the size of the marginal cost of producing the 101st unit.) The marginal cost of the 101st unit must be greater than 3.25 TL in order to “pull” the average up. To calculate it precisely (something you didn’t have to do) calculate the change in total cost. This is calculated as PxATC for 100 units we have 100x 3 TL = 300 TL and for 101 units we have 101x3.25 TL = 328.25 TL. Marginal cost is 328.25-300 = 28.25 TL, a value considerable larger than 3.25 TL Q.3) The table below shows the costs for a firm. Q 0 1 2 3 4 5 6 7 Total fixed costs 500 500 500 500 500 500 500 500 Total variable costs 0 100 180 280 400 540 700 880 Total cost 500 600 680 780 900 1040 1200 1380 Marginal costs - 100 80 100 120 140 160 180 Average fixed costs - 500 250 166.67 120 100 83.33 71.43 Average variable costs - 100 90 93.33 100 108 116.67 125.71 Average total costs - 600 340 260 225 208 200 197.17 a. Fill in the remaining costs. b. Show the ATC, AVC, AFC and MC on the same graph.

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2 c. Explain what is happening to average fixed costs as Q increases, and explain how this is reflected in your graph. AFC is decreasing in quantity as AFC=500/Q. Also, you can check this fact in the graph. In fact, AFC is always downward-sloping because that is defined as fixed amount of money divided by the quantity. Thus, if you increase quantity, the fixed cost spreads over increasing quantity to get less AFC. Q.4) The following table gives capital and labor combinations for 10 different levels of memory stick production of the Firm ABC. Q 0 1 2 3 4 5 6 7 8 9 10 K 4 4 4 4 4 4 4 4 4 4 4 L 0 9 17 24 31 39 48 58 69 81 94 a. Assume that the price of labor is \$5 and the price of capital is \$10 per unit. Compute total variable costs, the marginal costs, and the average variable costs for the firm at each output level, and graph their curves. Q 0 1 2 3 4 5 6 7 8 9 10 TVC 0 45 85 120 155 195 240 290 345 405 470 AVC - 45 42.5 40 38.75 39 40 41.43 43.13 45 47 MC - 45 40 35 35 40 45 50 55 60 65
3 b. Do the curves have the shapes that you expect? Explain.

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