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When TP=75 and L=5 average output =15 which is the maximum of ov
Average total cost is minimized at labor of 7 and TP=90. Average varia
Q.3)
a) economic profit measures include both the explicit and the implicit costs of pro
If Marcus made zero economic profit, his accounting profit was likely to be positi
b) Higher implicit costs would lead to lower economic profit. On the other hand, th
Q.4
K L Tp TFC
20 0 0 200
20 1 5 200
20 2 15 200
20 3 30 200
20 4 50 200
20 5 75 200
20 6 85 200
20 7 90 200
20 8 92 200
45
40
35
30
25
20
15
10
0
1 2 3 4
Q.6) An increase in the price of the variable input results in the AVC (avera
ATC (average total cost) and MC (marginal cost) moving up together.
The curves retain their shape and relative orientation.
An increase in the price of the fixed input results in only the ATC mov
The curves retain their shapes and MC continues to intersect the new
Q.7)
ATC=TC/Q=(VC+FC)/Q=(w*L+FC)/Q
ATC=(80*50+500)/Q=4500/Q
To find Q, we must use the fact that APL=Q/L and we know that APL=
ATC=4500/2500=1.8
MC = ( 80/75) = 1.065
ATC is increasing
MC is inreasing 1
AVC is decreasing 1
Q.8 The cost-minimizing choice depends on the ratio of the marginal prod
in the two countries, it is probable, all other things held constant, that
a and that in Mexico it will use relatively more labor and less capital.
Q.9) The average total cost curve is U-shaped because of the combined infl
increase in output and AVC decreases. As long as the failing effect of A
continuous to decline and when firms produce the optimum output, S
Refernce are in balance. At stage III, AFC will fall slowly due to the production w
variable factors. The failing effect of AFC is lower than the rising effect
There are a lots of little short-run ATC curves along the length
Referene
Q.10) 1 2 3
50 80 111
AC 50 40 37
Ans At 4,5,6 is econimises scale because per unit cost is minimum here
r worker, insurance
mic profit. On the other hand, there would beno change in Marcus’s accounting profit.
200
45 0
40 1 2 3 4
35
30
25 AFC
AVC
20 ATC
15 MC
10
0
1 2 3 4 5 6 7 8 9
PL=Q/L and we know that APL=50 and L=50. Plugging in,this gives us 50=Q/50 which means Q=2500.
000, 4000/2500=1.6
n the ratio of the marginal productivity of the input relative to the cost of the input in each country. Because input costs are very differ
other things held constant, that in the United States the firm will choose an input mix consisting of a lot of capital and relatively little la
more labor and less capital.
e substituted, the input mix will have to be identical. If input productivities vary between countries, the input choice may be Same i.e,
firm will use a lot oflabor in the United States as well)
ed because of the combined influences of the average fixed cost (AFC) and the average variable cost (AVC). At stage I, AFC beginsto fall
As long as the failing effect of AFC is higher than the rising effect of AVC, the short run average total cost (SATC) tends to decrease. At s
produce the optimum output, SATC will reach it minimum. AC remains constant at this stage since the failing effect of AFC and the risin
slowly due to the production with a negative marginal product for the variable input. AVC increases quickly due to diminishing returns
FC is lower than the rising effect of AVC. Therefore, SATC begins to increase
run ATC curves along the length of the long-run curve, when De econoies of scale occurs its means that the company has expandd too
ompany must focus on its labour, working hour and must increase its production and suspend its expanison decision
4 5 6 7 8 9
140 170 216 273 336 468
35 34 36 39 42 52
ale are: Specialization: Firms producing at a large scale employ a large number of workers. This allows the firms to practice
aller tasks. These individual tasks are assigned to separate workers. In this way workers spend all their work time on the part
m to perfect their skills. Overall result of this is that an average unit is produced at lower cost. Specialization also works at
chines and equipment are based on cutting edge technology and have high production capacity. Firms with large scale
and benefit from their full capacity. At full utilization such machinery or equipment achieves lower production cost per unit.
ther cannot afford such equipment or cannot utilize such machinery to its full capacity.
powerful position to negotiate better outcomes with parties such as suppliers, labor unions, financial institutions and
aterial, larger firms can obtain better trade discounts by bulk purchasing. They can negotiate lower wages because people are
n at low wages (not below minimum wage of course). Financial institutions such as banks are more willing to offer loans at lower
having large scale production.
50
00
TFC
50
TVC`
TC
00
50
0
1 2 3 4 5 6 7 8 9
Production
1.804082
se input costs are very different
capital and relatively little labor
n decision
e firms to practice
time on the part
also works at
h large scale
tion cost per unit.
utions and
ecause people are
o offer loans at lower
Assgnment 4
Q.1
Firm 1 is making losses since the average total cost is higher than mar
Firm 2 is making profit since all cost c
should not continue producing in the short run.
Q.2
a The firm will produce 205 units
c
By selling the items for $12.50 it costs you $5 for the material so 12.50
will produce until marginal cost crosses the demand curve. c) At that p
12.50 – (5+3) = $4.50
The
firm’s profit is *(12.50)(205)+ –
16,400 = 2,562.50-16,400 = -$13.837.50. The firm is losing money, bu
business in the short (as P>AVC)
Figure 7 shows the the typical firm in the industry, with average total
AT C1, marginal cost MC1 and price P1.
Q.4)
p
MC
30
25
q2 q1
Firm
When the patent expires and other firms are free to use th
firms’ average total cost curves decline to AT C2, so the ma
c P3 and firms earn no profits
b
firms in perfect competition, marginal revenue and average revenue
marginal revenue is equal to marginal cost, marginal cost must be $10
c
Average fixed cost is equal to AFC /Qwhich is $200/100 = $2. Since av
average fixed cost, AVC = $8 − $2 = $6
d Since average total cost is less than marginal cost, average total cost m
at an output level less than 100
Q.7)
Q VC FC
1 1 16
2 4 16
3 9 16
4 16 16
5 25 16
6 36 16
b At price $10, each firm will produce five units, so there will be 5 100 =
c
At a price of $10 and a quantity supplied of five, each firm is earning a
Thus, entry will occur and the price will fall. As price falls, quantity dem
At a price of $10 and a quantity supplied of five, each firm is earning a
Thus, entry will occur and the price will fall. As price falls, quantity dem
d P MC
Q.8)
Suppose that TC=100+15Q, where TC is the total cost and Q is the qua
produce any output in the short run? In the short run, the firm will sh
any output is AVC. Since TC = 100 + 15Q, we know that FC = 100 and V
b
Suppose that MC=4Q, where MC is the marginal cost. The perfectly co
price does it sell these units? To maximize profit in a perfectly competi
Q.10) Q P R
0 120 0
1 105 105
2 90 180
3 75 225
4 60 240
5 45 225
6 30 180
1155
Q.13
Q.14
a
The table below shows total revenue and marginal revenue
marginal revenue equals zero, since marginal cost equals ze
price equals marginal cost equals zero. The profit maximisin
P Q TR
8 0 0
7 1 7
6 2 12
5 3 15
4 4 16
3 5 15
2 6 12
1 7 7
0 8 0
b
The company should not build the bridge because its profit
$400,000.
d
Yes, the government should build the bridge, because it wo
cost of building the bridge.
d 1 A flat fee of 2000 Ectenian dollars would not alter the pro
profits would not alter the profit-maximizing price or quanti
Ectenian dollars if the director was paid that amount for ev
would be 25, the marginal cost at that level would be 500,
function, the quantity at which social welfare is maximized
Q = 37.5 As a result, the deadweight loss would
ge total cost is higher than marginal revenue. However, the firm can continue producing in the short run since it will achieve profits in t
is making profit since all cost curves are below the marginal cost curve. The firm should continue producing in the short run. Firm is m
hort run.
emand curve is perfectly elastic - in other words demand and price stay the same for the product regardless of how much you sell - the
o (you would stop producing at the point it ceased to be profitable – that is when the marginal cost crosses the demand curve - but as t
e demand curve - therefore you produce until you reach the plant’s capacity).
you $5 for the material so 12.50 - 5 = 7.50 7.50 less one hour staff cost of 7.50 - 3 = $4.50 Here, since the firm is making some profit, it w
s the demand curve. c) At that price, what is the firm’s profit or loss? Will the firm continue to produce in the short run? Carefully expla
50. The firm is losing money, but if it were to shut down , it would lose $15,000 (its fixed costs); Thus, the loss-minimizing choice is to st
P
S
ATC
D
Q Q
Industry
revenue and average revenue are equal. Since profit maximization also implies that
cost, marginal cost must be $10.
hich is $200/100 = $2. Since average variable cost is equal to average total cost minus
rginal cost, average total cost must be rising. Therefore, the efficient scale must occur
ed of five, each firm is earning a positive profit because price is greater than average total cost.
l fall. As price falls, quantity demanded will rise and the quantity supplied by each firm will fall
AC
s the total cost and Q is the quantity produced. What is the minimum price necessary for this firm to
n the short run, the firm will shut down if P < AVC, so the minimum price necessary for this firm to produce
Q, we know that FC = 100 and VC = 15Q, so AVC = 15Q/Q = 15
marginal cost. The perfectly competitive firm maximizes profits by producing 10 units of output. At what
ize profit in a perfectly competitive market, P = MC So P = 4*10 = $40
MR
0
105
75
45
15
-15
-45
e market chooses its shortrun production quantity by setting marginal revenue equal to marginal cost,
tically competitive market earnnegativeprofit, there aremorefirms in the market than there would be inlongrun equilibrium. As
nd for bikes from any given bike shop will increase, so that each bike shop sellsmore bikes at any given price. Because market
ly competitive firm earns zero economic profit in the longrun
nded)
demanded) + fixed costs
profits is still 500,000, no matter what the publisher pays the author. This is related to the definition of "sunk costs"
o QM and price rises to PM. Consumer surplus falls by areas D + E + F to areas B + C. Producer surplus becomes areas D + E, and total su
mers transfer the amount of areas D + E to producers and the deadweight loss is area F
revenue and marginal revenue for the bridge. The profit maximising price would be where revenue is maximised, which will occur whe
o, since marginal cost equals zero. This occurs at a price of $4 and quantity of 400. The efficient level of output is 800, since that's wher
quals zero. The profit maximising quantity is lower than the efficient quantity because the firm is a monopolist
MR
7
5
3
1
-1
-3
-5
-7
ld the bridge because its profits are negative. The most revenue it can earn is $1,600,000 and the cost is $2,000,000 so it would lose
uild the bridge, it should set price equal to marginal cost to be efficient. But marginal cost is zero, so the government should not charge
build the bridge, because it would increase society's total surplus, total surplus has area 1/2*8*800,000=$3,200,000, which exceeds th
me is the same as maximizing total revenue in this case because there are no variable costs. The total revenue from selling to each type
llowing tables
e adults $7 and sell 300 tickets. You should charge children $4 and sell 200 tickets. Total revenue will be $2,100 + $800 = $2,900. Becau
0, profit will be $900
not allowed, you would want to set a price of $7 for the tickets. You would sell 300 tickets and profit would be $100
ng to pay $4 but will not see the show now that the price is $7 will be worse off. The producer is worse off because profit is lower. Total
one that is better off
$400. In (b), there would be a $400 loss. There would be no change in (c).
d at the output where marginal revenue is equal to marginal cost. Therefore, setting the two equations equal, we get: 1,000 – 20Q = 1
e monopoly price is P = 1,000 – 10Q = 700
where price is equal to marginal cost: 1,000 – 10Q = 100 + 10Q 900 = 20Q Q = 45 At an output level of 45, the price would be 550
dollars would not alter the profit- maximizing price or quantity. The deadweight loss would be unaffected. (b) fee of 50 percent of the
rofit-maximizing price or quantity. The deadweight loss would be unaffected. 3. The marginal cost of production would rise b
or was paid that amount for every unit sold. The new marginal cost would be 100 + 10Q + 150. The new profit-maximizing outpu
ost at that level would be 500, and the price would rise to 750. The deadweight loss would be smaller. With the new margina
ich social welfare is maximized changes. Now, price is equal to marginal cost when Q = 37.5: 1,000 - 10Q = 250 + 10Q 750 =
ult, the deadweight loss would be equal to (0.5)(37.5-25)(750-500) = 1,562.50 Ectenian dollars rather than 2,250
e it will achieve profits in the long run.
in the short run. Firm is making losses and
of how much you sell - therefore the amount you sell is determined by your ability
he demand curve - but as the question does not specify a change in costs with
m is making some profit, it will produce until it reaches the capacity of the plant. It
short run? Carefully explain your answer. At a price of $12.50, the firm’s profit is