CLEP Microeconomic Notes 1

Ai 1 worker produces 15 units 15 aii 2 workers

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a.i) 1 worker produces 15 units (+15) a.ii) 2 workers produce 35 units (+20) a.iii) 3 workers produce 40 units (+5) a.iv) 4 workers produce 44 units (+4)

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b) When the 3 worker is hired 76) Herfindahl Index – measures whether an industry is a monopoly or perfectly competitive a) Used by the Federal Trade Commission and Justice Department to evaluate whether or not a monopoly is present a.i) Herfindahl index of zero (0) is perfectly competitive a.ii) Herfindahl index of 10,000 indicates a monopolized industry 77) Total Costs ( TC) 78) Total Variable Costs (TVC) 79) Average Variable Costs (AVC) 80) Fixed Cost (FC) 81) Wages (W) 82) Quantity of Labor (QL) 83) Fixed costs are \$75 and 3 workers earn \$150 per day, determine the total costs and average variable costs of producing 30 units 84) Total Costs = \$525 a) TC = FC + (QL x W) b) TC = \$75 + (3 x \$150) c) TC = \$525 85) Average Costs = \$15 a) TVC = TC – FC b) TVC = (\$525 - \$75) c) TVC = \$450 d) AVC= \$450/30 e) AVC = \$15 86) Public Interest Theory – when government regulates/intervenes with the business markets it is protecting the best interests of society 87) Taxation – the main method the Federal government addresses the income disparity a) USA uses a progressive tax system, the wealthier pay more, which helps redistribute wealth Firm Basics 88) Average Fixed Cost (AFC) – fixed costs remain the same whether 1 or 100 products are produced a) Continuously decreases as the output increases b) When a firm increases production, the average fixed costs will always decrease ?? c) Slopes down d) Bottom downward sloping line on the price/quantity graph d.i)Fixed cost include rent, insurance, mortgages, and equipment 89) Average Total Cost (ATC) – if process are set below this curve the firm loses money a) But they can continue operations in the short run 90) Total Costs – are calculated by adding total variable costs (TVC) and total fixed costs (TFC) together a) TC=TVC + TFC
91) Marginal Cost (MC) – the increase in total cost when one unit of output is added a) The change in total cost divided by the change in quantity a.i) “how much does it cost to produce the additional unit?” (a.i.1) 0 units - \$35 (a.i.2) 1 unit - \$44 (a.i.3) 2 units - \$52 (a.i.4) 3 units - \$59 (a.i.5) 4 units - \$64 (a.i.6) 5 units - \$71 (a.i.7) 6 units \$79 b) What is the marginal cost to produce the 4 th unit = \$5 b.i)TC of unit 4 minus TC of unit 3 b.ii) \$64-\$59= \$5 92) Total Fixed Cost (TFC) a) If a baker can produce \$100 cakes for an average total cost of \$16. His average variable cost (AVC) is \$10. What is the total fixed cost (TFC) ? = \$600 a.i) TC = 100 x \$16 = \$1600 a.ii) TVC = 100 x \$10 = \$1,000 a.iii) TFC=TC (\$1600) – TVC (\$1000) a.iv) TFC = \$600 (a.iv.1) To also find AFC simply divide the \$600 by 100 (quantity produced) (a.iv.2) AFC = \$6 (a.iv.3) AFC=TFC/Q a.v) Fixed costs are the same regardless of the number of units produced, if the cost to produce 0 units is given this is the fixed cost. b) If the firm is producing 5 units of output, the Average Fixed Cost (AFC) is? \$7.00 b.i)0 units - \$35 b.ii) 1 unit - \$44 b.iii) 2 units - \$52 b.iv) 3 units - \$59 b.v) 4 units - \$64 b.vi) 5 units - \$71 b.vii) 6 units \$79 (b.vii.1) AFC = TFC / Q (b.vii.2) AFC = \$35 / 5 (b.vii.3) AFC = \$7.00 b.viii) Remember the TFC are the costs associated with zero units of output 93) What is the Average Variable Cost (AVC) if the firm is producing 3 units of output? \$8.00 a.i) 0 units - \$35

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a.ii)
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• Winter '12
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