Unformatted text preview: PADP 6950: Founda1ons of Policy Analysis Supply PRACTICE Angela Fer1g, PhD Let PQ=$5, PL=$10, PK=$10 (where K=bucket) K 2 2 2 2 2 3 3 3 4 4 4 L 0 1 2 3 4 2 3 4 2 3 6                               Q 0 TC FC VC AFC AVC ATC MC  Results from Golf Ball Game 1 Graph Ques1ons Does this firm have economies of scale? (over what range?) Show graphically the profit when PQ=5 At what PQ will firm shut down? What will PQ be in the LR if compe11ve industry and everyone has same cost curves? 2 Problem with equa1ons A firm has cost func1on C(Q)=100+10Q What are the fixed costs? What is equa1on for AFC? What are the variable costs? What is equa1on for AVC? What is the equa1on for ATC? What are the marginal costs? Draw costs curves 3 Discussion If these are longrun costs, does this firm exhibit economies of scale? Why is the MC below the ATC for all Q? Can you think of a firm which might have a horizontal MC curve like this? Let's do it in reverse Our firm currently has one factory which costs $1000. To produce our first unit, we need workers who cost $2 each. Our produc1on func1on is Q=K1/2L3/4 How much labor do we need to hire to produce Q units? (solve for L in terms of Q) What is the shortrun total cost as a func1on of Q? Recall: TC = FC + VC = K*PK+L*PL What is the ATC equa1on? 4 Draw costs curves Now you do one A flower shop owner has her choice of 3 different floor sizes: 200 sq h, 500 sq h, 1000 sq h at a price of $1/sq h If she has F sq h and sells Q bouquets a month, her variable costs will be cv(Q)=Q2/F per month For each shop size: What is her total average cost func1on? Graph the ATC: At what Q is average cost minimized? At this Q , how much is average cost? 5 Draw 3 costs curves and LRAC 6 ...
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 Spring '11
 Fergi
 Economics, Angela, AFC, AVC ATC

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