Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 8

The Costs of Production - all with Video Answers

Educators

Chapter Questions

Problem 1

Distinguish between explicit and implicit costs, giving examples of each. What are some explicit and implicit costs of attending college? Why does the economist classify normal profit as a cost? Is economic profit a cost of production?

Jake Zanazzi

Jake Zanazzi

Numerade Educator

Problem 2

Gomez runs a small pottery firm. He hires one helper at $\$ 12,000$ per year, pays annual rent of $\$ 5000$ for his shop, and spends $\$ 20,000$ per year on materials. He has $\$ 40,000$ of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $\$ 4000$ per year if alternatively invested. He has been offered $\$ 15,000$ per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $\$ 3000$ per year. Total annual revenue from pottery sales is $\$ 72,000 .$ Calculate the accounting profit and the economic profit for Gomez's pottery firm.

Jake Zanazzi

Numerade Educator

Problem 3

Which of the following are short-run and which are longrun adjustments?
a. Wendy's builds a new restaurant.
b. Harley-Davidson Corporation hires 200 more production workers.
c. A farmer increases the amount of fertilizer used on his
corn crop.
d. An Alcoa aluminum plant adds a third shift of workers.

Jake Zanazzi

Numerade Educator

Problem 4

Complete the table directly below by calculating marginal product and average product. Plot the total, marginal, and average products and explain in detail the relationship between each pair of curves. Explain why marginal product first rises, then declines, and ultimately becomes negative. What bearing does the law of diminishing returns have on short-run costs? Be specific. "When marginal product is rising, marginal cost is falling. And when marginal product is diminishing, marginal cost is rising." Illustrate and explain graphically.
$$\begin{aligned}
&\\
&\begin{array}{|c|c|c|c|}
\hline \begin{array}{c}
\text { Inputs of } \\
\text { Labor }
\end{array} & \begin{array}{c}
\text { Total } \\
\text { Product }
\end{array} & \begin{array}{c}
\text { Marginal } \\
\text { Product }
\end{array} & \begin{array}{c}
\text { Average } \\
\text { Product }
\end{array} \\
\hline 0 & 0 & & \\
1 & 15 & & \\
2 & 34 & & \\
3 & 51 & & \\
4 & 65 & & \\
5 & 74 & & \\
6 & 80 & & \\
7 & 83 & & \\
8 & 82 & & \\
\hline
\end{array}
\end{aligned}$$

Jake Zanazzi

Numerade Educator

Problem 5

Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, depreciation and obsolescence charges, sales taxes, and rental payments on Ieased office machinery. "There are no fixed costs in the long run; all costs are variable." Explain.

Jake Zanazzi

Numerade Educator

Problem 6

List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1000 miles to Florida for spring break. Which costs-fixed, variable, or both-would you take into account in making your decision? Would any implicit costs be relevant? Eixplain.

Jake Zanazzi

Numerade Educator

Problem 7

A firm has fixed costs of S60 and variable costs as indicated in the table at the bottom of this page. Complete the table and check your calculations by referring to question 4 at the end of Chapter $9 .$ LO3
a. Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves.
b. Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and the ATC curves at their minimum points.
c. Explain how the location of each curve graphed in question $7 \mathrm{b}$ would be altered if (1) total fixed cost had been \$100 rather than $\$ 60$ and (2) total variable cost had been
S10 less at each level of output.
CAN'T COPY THE TABLE

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 8

Indicate how each of the following would shift the (1) marginal-cost curve, (2) average-variable-cost curve, (3) average-fixed-cost curve, and (4) average-total-cost curve of a manufacturing firm. In each case specify the direction of the shift.
a. A reduction in business property taxes.
b. An increase in the nominal wages of production workers.
c. A decrease in the price of electricity.
d. An increase in insurance rates on plant and equipment.
e. An increase in transportation costs.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 9

Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the accompanying figure. What plant size will the firm choose in producing $(a) 50,(b) 130,(c) 160,$ and $(d) 250$ units of output? Draw the firm's long-run average-cost curve on the diagram and describe this curve.
CAN'T COPY THE FIGURE

Norman Atentar

Numerade Educator

Problem 10

KEY QUESTION Use the concepts of economies and diseconomies of scale to explain the shape of a firm's long-run ATC curve. What is the concept of minimum efficient scale? What bearing can the shape of the long-run ATC curve have on the structure of an industry?

Srikar Katta

Numerade Educator

Problem 11

What is a sunk cost? Provide an example of a sunk cost other than one from this book. Why are such costs irrelevant in making decisions about future actions?

Jake Zanazzi

Numerade Educator