Chapter 7 : Short Run Costs and Output Decisions

Solutions to Application Questions

1.

a.There are some fixed costs.That can happen only in the short run.

b.Marginal product is decreasing as production increases.This is happening because of diminishing

marginal productivity.Marginal productivity is greatest with the second worker(19 units).

c.See the following table

#of Output TVC TFC AVC AFC ATC MC

workers
0 0 $0 $110 $110 - - - -
1 12 30 110 140 $2.50 $$9.16 $11.67 $2.50
2 31 60 110 170 $1.94 $3.55 $5.48 $1.58
3 41 90 110 200 $2.20 $2.68 $4.88 $3.00
4 50 120 110 230 $2.40 $2.20 $4.60 $3.33
5 58 150 110 260 $2.59 $1.90 $4.48 $3.75
6 64 180 110 290 $2.81 $1.72 $4.53 $5.00
7 67 210 110 320 $3.13 $1.63 $4.78 $10.00

d.See the following diagram.Note that marginal curves are drawn halfway between the quantity
values.

e.The two levels are the same.At that output level , the extra worker is the most productive of all, so
the extra hiring cost is spread over the largest number of extra units.
2.

a.$4,30

b.Ken’s total fixed cost includes any cost that are present when output is zero,therefore,total fixed
cost equals $5000

c.See the following table

ANIMALS PER WEEK MARGINAL COST PER WEEK

0-100 $2.00
101-200 2.70
201-300 3.10
301-400 3.50
401-500 3.90
50-600 4.30
601-700 4.70

d.If output is 200, marginal cost is $2,70. Because the price is $4,30, the marginal revenue is alo
$4,30. Because marginal cost is less than marginal revenue , Ken should increase output. In fact , the
profit maximizing output level is 600.

e.Ken’s maximum profit is TR-TC=$2,580-$2,450=130

f.This change is Ken’s costs will not affect the profit maximizing output level. Rent is a fixed cost,
which ,therefore,does not influence marginal cost.

3.See the following diagram.

-
4.TVC=TC-TFC=6000-2000=4000

q=TC/ATC=20

AVC=4000/20=200

5.

a.b.c.See the following table.

Output P(MR) Profit

0 30 -20
1 30 0
2 20 20 30 50 60 30 10
3 20 30 60 80 90 30 10
4 20 40 100 120 120 30 0
5 20 50 150 170 150 30 -20
6 20 60 210 230 180 30 -50

d.The firm should produce three units for total profit of $10.

e.See the table.The firm will choose to produce three units.

f.There should be an increase in the number of firms in the long run.Supply will shift to the right ,
making the market price fall.

g.When pice is $20, the profit max outpt level is 2 units ; at $40 , it’s 4;at $50, it’s 5; and at $60 it’s 6.