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Chapter 5 Assignment 1. Fill in all the blanks in table below using the limited cost information provided. Hints: [1] If you know an average, you...

Indicate how each of the following events would affect a firm’s indicated short run cost curves (i.e. would the
cited curve shift up, shift down, experience a movement along, or experience no change).
Hint: See pp. 8-12 in the Notes found in the Chapter 5 Student Package.

Slumping sales cause the firm to lay off workers.

ATC effect =

MC effect =

Wage rates decrease by 20 percent.

AFC effect =

MC effect =
Chapter 5 Assignment 1. Fill in all the blanks in table below using the limited cost information provided. Hints: [1] If you know an average , you should be able to calculate a total , [2] marginal cost reflects the cost of each additional unit [i.e. MC = ∆TC/∆Q = ∆TC/1 = ∆TC]. Hints: See the Key Concepts found in the Chapter 5 Student Package. See also TYU Problem 7 [in particular, the calculation of average and marginal cost from the provided total cost information] in the Chapter 5 Student Package. Q TFC TVC TC AFC AVC ATC MC 0 100 - - - - 1 40 2 20 3 90 30 2. Indicate how each of the following events would affect a firm’s indicated short run cost curves (i.e. would the cited curve shift up, shift down, experience a movement along, or experience no change ). Hint: See pp. 8-12 in the Notes found in the Chapter 5 Student Package. Slumping sales cause the firm to lay off workers. ATC effect = MC effect = Wage rates decrease by 20 percent. AFC effect = MC effect = 3. Fill in the blanks to make the following statements correct. Hints: See pp. 144-162 in Chapter 5 of the course textbook. See also the Chapter Notes entitled “The Short-Run Behavior of Firm Productivity and Cost” found in the Chapter 5 Student Package [pp. 5-12]. [a] The demand curve faced by a single firm in perfectly competitive industry coincides with the firm’s ________________curve and its __________________ curve. [b] A perfectly competitive firm’s demand curve has a price elasticity of demand value equal to _____________. [c] Total revenue is calculated by multiplying ___________and ____________. Average revenue is calculated by dividing ____________by________________. Marginal revenue is calculated by dividing ___________ _______________ by _______________________. [d] A firm’s loss when it produces no output is equal to its_______________. [e] The shut-down price is the price at which the firm can just cover its________________. [f] If the average variable cost of producing any given output level exceeds the price at which it can be sold, then the firm should _____________________. [g] The profit-maximizing level of output for a price-taking firm is the output at which _____________ and ______________are ____________. [h] If a perfectly competitive firm is producing its profit-maximizing level of output and the price of its output suddenly rises, then MR will be _________ when compared to MC and the firm should ________ output. [i] The short-run supply curve for a perfectly competitive firm is that firm’s marginal cost curve for levels of output where marginal cost exceeds__________________. [j] If a firm is producing a level of output where MR equals MC but is suffering losses, we know that price is below___________. This firm should continue to produce so long as price exceeds _________________.
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[k] If a firm is earning profits, we know that price is above its ______________________. 4. Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost is the wages paid to the cooks and the food ingredients. The total cost [TC] associated with each level of output is given in the table below. Quantity of Meals TC ATC AVC MC 0 $100 - - - 10 300 20 400 30 580 40 800 50 1,100 Hints: See the Chapter Notes entitled “Short Run Profit Maximization and the Perfectly Competitive Firm” [pp. 12-15] in the Chapter 5 Student Package. See also TYU Problem 7 in the Student Package. [a] Calculate the average total cost, the average variable cost, and the marginal cost for each quantity of output [indicate your answers in the provided table]. [b] What Kate’s break-even price [provide a numerical answer]? [c] What is Kate’s shutdown price [provide a numerical answer]? [d] Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, should she produce or shut down? If she should produce, how much should be produced? [e] Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, should she produce or shut down? If she should produce, how much should be produced? [f] Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, should she produce or shut down? If she should produce, how much should be produced? 5. Why might the price elasticity of supply for basic wooden chairs be more elastic than that for finely-crafted wooden chairs? Hint: See pp. 166-168 in Chapter 5 of the course text.
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