microeconomics book solution 12

# D false when marginal cost is above average total

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d. False. When marginal cost is above average total cost, average total cost must be rising. If the additional cost of producing one more unit of output is greater than what it costs to produce each unit of output on average, then producing that one more unit of output must increase the average total cost. Quantity TC MC of unit ATC of unit AVC of unit 0 \$ 20.00 \$ 20.00 1 40.00 \$ 40.00 \$ 20.00 10.00 2 50.00 25.00 15.00 16.00 3 66.00 22.00 15.33 20.00 4 8 6.00 21.50 16.50 24.00 5 110.00 22.00 1 8 .00 C H A P T E R 1 2 B E H I N D T H E S U P P LY C U R V E : I N P U T S A N D C O S T S S-179 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-179

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Solution 10. Mark and Jeff operate a small company that produces souvenir footballs. Their fixed cost is \$2,000 per month. They can hire workers for \$1,000 per worker per month. Their monthly production function for footballs is as given in the accompanying table. a. For each quantity of labor, calculate average variable cost ( AVC ), average fixed cost ( AFC ), average total cost ( ATC ), and marginal cost ( MC ). b. On one diagram, draw the AVC, ATC, and MC curves. c. At what level of output is Mark and Jeff’s average total cost minimized? 10. a. The AVC, AFC, ATC, TC, and MC are given in the accompanying table. b. The accompanying diagram shows the AVC, ATC, and MC curves. c. According to the table, Mark and Jeff’s average total cost is minimized at 1,200 footballs per month, where the ATC is \$4.17. 200 400 600 800 1,000 1,200 1,400 1,600 0 \$10 8 6 4 2 Cost of football Quantity of footballs MC ATC AVC Quantity of labo r Quantity of AVC of AFC of ATC of TC of MC of (wo r ke r s) footballs football football football footballs football 0 0 \$ 2,000.00 \$ 3.33 1 300 \$ 3.33 \$ 6.67 \$ 10.00 3,000.00 2.00 2 8 00 2.50 2.50 5.00 4,000.00 2.50 3 1,200 2.50 1.67 4.17 5,000.00 5.00 4 1,400 2. 8 6 1.43 4.29 6,000.00 10.00 5 1,500 3.33 1.33 4.67 7,000.00 Quantity of labo r (wo r ke r s) Quantity of footballs 0 0 1 300 2 8 00 3 1,200 4 1,400 5 1,500 S-180 C H A P T E R 1 2 B E H I N D T H E S U P P LY C U R V E : I N P U T S A N D C O S T S S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-180
Solution Solution 11. You produce widgets. Currently you produce 4 widgets at a total cost of \$40. a. What is your average total cost? b. Suppose you could produce one more (the fifth) widget at a marginal cost of \$5. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Why? c. Suppose instead that you could produce one more (the fifth) widget at a marginal cost of \$20. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Why? 11. a. Your average total cost is \$40/4 = \$10 per widget. b. If you produce one more widget, you are producing five widgets at a total cost of \$40 + \$5 = \$45. Your average total cost is therefore \$45/5 = \$9. Your average total cost has decreased because the marginal cost of the additional widget is below the average total cost before you produced the additional widget. c. If you produce one more widget, you are producing five widgets at a total cost of \$40 + \$20 = \$60. Your average total cost is therefore \$60/5 = \$12. Your average total cost has increased because the marginal cost of the additional widget is above the average total cost before you produced the additional widget.

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