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Chapter 13

The Costs of Production

Educators


Problem 1

This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost,
average total cost, and marginal cost. Fill in the type of cost that best completes each sentence:
a. What you give up in taking some action is called the ______.
b. _____ is falling when marginal cost is below it and rising when marginal cost is above it.
c. A cost that does not depend on the quantity produced is a(n) ______.
d. In the ice-cream industry in the short run, ______ includes the cost of cream and sugar but not the cost of the factory.
e. Profits equal total revenue minus ______.
f. The cost of producing an extra unit of output is the ______.

Kaylee M.
Numerade Educator

Problem 2

Your aunt is thinking about opening a hardware store. She estimates that it would cost $\$$500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $\$$50,000 per year job as an accountant.
a. Define $\textit{opportunity cost}$.
b. What is your aunt's opportunity cost of running the hardware store for a year? If your aunt thinks she can sell $\$$510,000 worth of merchandise in a year, should she open the store? Explain.

Kaylee M.
Numerade Educator

Problem 3

A commercial fisherman notices the following relationship between hours spent fishing and the quantity
of fish caught:
a. What is the marginal product of each hour spent fishing?
b. Use these data to graph the fisherman's production function. Explain its shape.
c. The fisherman has a fixed cost of $\$$10 (his pole). The opportunity cost of his time is $\$$5 per hour. Graph the fisherman's total-cost curve. Explain its shape.

Yi Chun L.
Washington University in St Louis

Problem 4

Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus's output during a given day:
a. Fill in the column of marginal products. What pattern do you see? How might you explain it?
b. A worker costs \$100 a day, and the firm has fixed costs of \$200. Use this information to fill in the column for total cost.
c. Fill in the column for average total cost. (Recall that $\textit{ATC = TC/Q.}$) What pattern do you see? d. Now fill in the column for marginal cost. (Recall that $\textit MC= \Delta TC/\Delta Q.$) What pattern do you see?
e. Compare the column for marginal product with the column for marginal cost. Explain the relationship. f. Compare the column for average total cost with the column for marginal cost. Explain the relationship.

Heather D.
Numerade Educator

Problem 5

You are the chief financial officer for a firm that sells digital music players. Your firm has the following
average-total-cost schedule: Your current level of production is 600 devices, all of which have been sold. Someone calls, desperate to buy one of your music players. The caller offers you $\$$550 for it. Should you accept the offer? Why or why not?

Yi Chun L.
Washington University in St Louis

Problem 6

Consider the following cost information for a pizzeria:
a. What is the pizzeria's fixed cost?
b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also, calculate the marginal cost per dozen pizzas using the information on variable cost. What is the relationship between these sets of numbers? Explain.

Yi Chun L.
Washington University in St Louis

Problem 7

Your cousin Vinnie owns a painting company with fixed costs of $\$$200 and the following schedule for variable costs:
$$\mathrm{Quantity \, of \,Houses \, Painted \, per \, Month} \quad 1\quad 2\quad 3\quad 4\quad 5\quad 6\quad 7$$
$$\mathrm{Variable\, Costs} \quad$10 \quad$20 \quad$40 \quad$80 \quad$160 \quad$320 \quad$640$$
Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the
efficient scale of the painting company?

Yi Chun L.
Washington University in St Louis

Problem 8

The city government is considering two tax proposals:
$\cdot$ A lump-sum tax of \$300 on each producer of hamburgers.
$\cdot$ A tax of \$1 per burger, paid by producers of hamburgers.
a. Which of the following curves-average fixed cost, average variable cost, average total cost, and marginal cost-would shift as a result of the lump-sum tax? Why? Show this in a graph. Label the graph as precisely as possible.
b. Which of these same four curves would shift as a result of the per-burger tax? Why? Show this in a new graph. Label the graph as precisely as possible.

Kaylee M.
Numerade Educator

Problem 9

Jane's Juice Bar has the following cost schedules:
a. Calculate average variable cost, average total cost, and marginal cost for each quantity.
b. Graph all three curves. What is the relationship between the marginal-cost curve and the average-total-cost curve? Between the marginal-cost curve and the average-variablecost curve? Explain.

Yi Chun L.
Washington University in St Louis

Problem 10

Consider the following table of long-run total costs for three different firms: Does each of these firms experience economies of scale or diseconomies of scale?

Yi Chun L.
Washington University in St Louis