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Economics

David Begg, Gianluigi Vernasca, Stanley Fische

Chapter 7

Costs and supply - all with Video Answers

Educators

Chapter Questions

02:52

Problem 1

(a) What information does the production function provide? (b) Explain why the production function does not provide enough information for anyone actually to runa firm

Manasvee Singh
Manasvee Singh
Numerade Educator
07:43

Problem 2

(a) Calculate the marginal and average costs for each level of output from the following total cost data. (b) Show how marginal and average costs are related.
(c) Are these short-run or long-run cost curves? Explain how you can tell.
$$
\begin{array}{|l|l|l|l|l|r|r|r|r|r|r|}
\hline \text { Oulput } & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 \\
\hline \text { TC }[\underline{f}) & 12 & 27 & 40 & 51 & 60 & 70 & 80 & 91 & 104 & 120 \\
\hline
\end{array}
$$

Kelly Brooks
Kelly Brooks
Numerade Educator
00:53

Problem 3

(a)Explain why it might make sense for a firm to produce goods that it can only sell at a loss. (b) Can it keep on doing this forever? Explain.

Daniel Cisneros
Daniel Cisneros
Numerade Educator
05:49

Problem 4

Common fallacies Why are these statements wrong? (a) Firms making losses should quit at once. (b) Big firms can always produce more cheaply than smaller firms can. (c) Small-scale production is always better.

Mohan Jain
Mohan Jain
Numerade Educator
01:51

Problem 5

The table below shows how output changes as inputs change for three different output levels. The wage rate is $£ 5$ and the rental rate of capital is $£ 2$.
$$
\begin{array}{|l|l|l|c|c|l|c|}
\hline & \text { Column } 1 & \text { Column } 2 & \text { Column } 3 & \text { Column } 4 & \text { Column } 5 & \text { Column } 6 \\
\hline \text { Caplral input } & 4 & 2 & 7 & 4 & 11 & 8 \\
\hline \text { Labour input } & 5 & 6 & 10 & 12 & 15 & 16 \\
\hline \text { Output } & 4 & 4 & 8 & 8 & 12 & 12 \\
\hline
\end{array}
$$
a. For each output level in the above table, which technique of production is more capital intensive?
b. Refer to columns 2,3 and 6 . Does the firm switch towards or away from more capital-intensive techniques as output rises?

Armaan Tourani
Armaan Tourani
Numerade Educator
05:28

Problem 6

For each of the following cases explain how long you think the short run is: a) a power station; (b) a hypermarket; (c) a small grocery retail business. In explaining your answer, specify any assumptions you need to make. For each case, do you expect the law of diminishing marginal returns to hold?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:26

Problem 7

Suppose the rental rate of capital in the table below is $£ 3$ and the wage rate is $£ 5$.
(a) Suppose the firm is currently using the production techniques shown in
columns 1,3 and 5 for output levels 4,8 and 12 , respectively. Would the firm switch to columns 2,4 or 5 , respectively, for any levels of output? (b) How do the firm's total and average costs change when the rental rate of capital rises?

Niamat Khuda
Niamat Khuda
Numerade Educator
01:18

Problem 8

The marginal cost of supplying another unit of output of an electronic product via the Internet is almost zero. If long-run equilibrium means price equals marginal cost, all Internet firms will go bust. Can you resolve this situation?

Srikar Katta
Srikar Katta
Numerade Educator
01:42

Problem 9

What kind of returns to scale do the following production functions display?
(a) $Q=\sqrt{K L}$ (b) $Q=K_{0.3} L_{0.2}$ (c) $Q=K+L$

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:05

Problem 10

(a) What are economies of scale and why might they exist? (b) The table below shows how output changes as inputs change. The wage rate is $£ 5$ and the rental rate of capital is $£ 2$. Calculate the lowest-cost method of making 4,8 and 12 units of output. (c) Are there increasing, constant or decreasing returns to scale between those outputs? Which applies where?

Nick Johnson
Nick Johnson
Numerade Educator
01:36

Problem 11

The following graph shows the isoquant for a firm. What do points $A, B, C$ and $D$ on the isoquant represent? Which is the most labour intensive and the most capital intensive technique of production on this isoquant?

Niamat Khuda
Niamat Khuda
Numerade Educator
03:18

Problem 12

Suppose that firm $\mathrm{A}$ has the following short-run production function $\mathrm{Q}=\mathrm{K}_{\mathrm{c}} \sqrt{\mathrm{L}}$, where $K$ denotes capital and $L$ labour. Suppose that the level of capital is fixed at $\mathrm{k}_{0}=10$ The total cost of firm $\mathrm{A}$ in the short run is $\mathrm{STC}=10 \mathrm{wL}$ where $w$ is the wage paid to each worker. Assume that the wage is $£ 20$. Using the production function, show how the short-run total cost depends on the quantity produced $Q$. Plot the short-run total cost on a graph, where you put $Q$ on the horizontal axis.

Anand Jangid
Anand Jangid
Numerade Educator
02:33

Problem 13

The following table shows data about quantity produced and total cost of production in the long run for a given firm: Find the long-run marginal cost and the long-run average cost faced by the firm. On a graph, plot the $L M C$ and $L A C$ curves. Explain why the $L M C$ curve cuts the $L A C$ curve from below.

Doris Bennett
Doris Bennett
Numerade Educator
01:29

Problem 14

Essay question We choose between couriers such as DHL and Federal Express based on the quality, convenience and reliability of service that they offer, not just on the price that they quote. Once we recognize that service matters, the inevitability of scale economies is greatly reduced. Even Amazon has to organize the distribution of the products it sells. Do you agree?

Ameer Said
Ameer Said
Numerade Educator