PS7-Answers - METU Department of Economics Econ 101 Fall...

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1 METU Department of Economics Econ 101 Fall 2009 PROBLEM SET # 7 (with Answers) PART A- PROBLEMS Q.1. The following table gives capital and labor requirements for 10 different levels of production: a. Assuming that the price of labor is \$5 per unit and the price of capital 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. b. Do the curves have the shapes that you might expect? Explain. c. Using the numbers here, explain the relationship between marginal cost and variable cost. d. Using the numbers here, explain the meaning of “marginal cost” in terms of additional inputs needed to produce a marginal unit of output. e. If output price was \$ 57, how many units of output would the firm produce? Explain.

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2 Answer: a. b. Yes. Given diminishing returns, MC may fall at first but should eventually rise with output. c. When MC is below AVC, AVC falls; when MC is above AVC, AVC rises. At 3 units of output, MC = 35 < AVC = 40, thus AVC falls. At 6 units, MC = 45 > AVC = 40, thus AVC rises. d. Marginal cost is the added cost of the resources needed to increase output one unit. The MC of the sixth unit of output, for example, is \$45; 2 units of K at \$10 each plus 5 units of L at \$5 each. e. The firm would increase production as long as P > MC . The optimal level of output would be 8.
3 Q.2) A firm’s cost curves are given as follows: Q TC TFC TVC AVC ATC MC 0 \$ 100 \$100 1 130 100 2 150 100 3 160 100 4 172 100 5 185 100 6 210 100 7 240 100 8 280 100 9 330 100 10 390 100 a. Complete the table. b. Graph AVC, ATC and MC on the same graph. What is the relationship between the MC curve and ATC and between MC and AVC? c. Suppose the market price is 30 TL. How much will the firm produce in the short run? How much are total profits? d. Suppose that market price is 50 TL. How much will the firm produce in the short run? How much are total profits? e. Suppose that market price is 10 TL. How much will the firm produce in the short run? How much are total profits? Answer: a.

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b. c. 7 units. Profit = Total Revenue – Total Cost (TFC + TVC) = (7*30) – (100 + 140) = - \$30 (Firm makes losses of \$30) d. 9 units Profit = (9*50) - (100 + 230) = \$ 120 (Firm makes profit of \$120) e. Because a price of \$10 is below the minimum AVC , the firm should shut down and incur only fixed costs, for a total loss of \$100. Q.3. A wheat farmer has total production costs given by the equation TC=100+Q+Q 2 , where Q is output, measured in bushels of wheat. a. Fill out the table with columns for quantity (Q), total cost (TC), fixed cost (FC), variable cost (VC), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC). Q
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This note was uploaded on 01/05/2012 for the course ECON 101 taught by Professor Gulipektunc during the Spring '11 term at Middle East Technical University.

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PS7-Answers - METU Department of Economics Econ 101 Fall...

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