Economics 1021A/B Lecture 16: Costs

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10 Nov 2015

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Economics1021 lecture 016 chapter 11 . Short run costs: to produce more output in the short run, the firm must employ more labour, which means that it must increase it"s costs. 3 concepts and 3 types of cost curves are: total cost, marginal cost, average cost. Total cost: (tc) cost of all resources used: ex, oven + sugar + dough to make cookies. Total fixed costs: (tfc): costs that do not change with output: ex. Total variable costs: (tvc): does change with output: ex. Notice that the tp curve becomes steeper at low output lvls an then less steep at high output lvls. Marginal cost: (mc) the increase in total cost that results from a one-unit increase in total product. Calculate by: increase in total cost divided by increase in output. Average fixed cost (afc) the total fixed cost per unit of output sloping down because same cost, but more labour.

Related Questions

You manage a plant that mass-produces engines by teams of workers using assembly

machines. The technology is summarized by the production function

q = 5 KL

where q is the number of engines per week, K is the number of assembly machines, and L

is the number of labor teams. Each assembly machine rents for r = $10,000 per week, and

each team costs w = $5000 per week. Your plant has a fixed installation of 5assembly machines as part of its design.

In the SHORT RUN:

For any given level of output q, write the expression for the number of Labor teams required.

b. What is the cost function for your plant ï¿½ namely, how much would it cost to produce q engines? (Hint: TC=TFC+TVC, TFC=rK, TVC=wL)

c. What are average and marginal costs for producing q engines? How do average costs vary with output?

d. How many Labor teams are required to produce 250 engines? What is the average cost per engine?

In the LONG RUN:

e. You are asked to make recommendations for the design of a new production facility. What capital/labor (K/L) ratio should the new plant accommodate if it wants to minimize the total cost of producing at any level of output q? MPL=5K, MPK=5L.

f. For output q=500, how many L and K should you use in order to minimize cost?

g. What is the minimum cost of production for q=500?

h. What is the minimum cost of product for any output q? (Note: write TC as a function of q).

i. If w is increased to $10,000 per week, how does this change the capital/labor (K/L) ratio if you want to minimize the total cost of production?

j. Given the new wage rate, how many L and K should you use in order to minimize cost for output q=500?

k. Is the expansion path a straight or a curved line? Is it upward or downward sloping? Why?

4. Decisions made âat the marginâ entail a choice based upon_____________ of a decision.

a. the additional benefits
b. the total costs
c. comparing the total benefits and costs
d. comparing the additional benefits and costs
5. 100 units of Good X are available but individuals desire 500units. ______________ will determine who attains Good X, and whodoes not.

a. A rationing device
b. Opportunity Cost
c. Utility
d. Natural Selection

6. Individuals will continue consuming so long as:

a. The price of a good continues to decrease
b. The marginal costs of consuming are outweighed by the marginalbenefits
c. The individual seeks additional utility
d. The individual is willing and able

8. If the cross-price elasticity of two goods is positive, thenthose two goods are
a. substitutes.
b. complements.
c. normal goods.
d. inferior goods.

11. The basic reason most supply curves are upward sloping isthat:

a. More firms are in the market, therefore more goods areproduced.
b. Because more quantity is being demanded, suppliers raise theprice.
c. Producers face higher opportunity costs when producing higherlevels of quantity, so they must receive a higher price.
d. Producers seek to maximize total revenue.

18. When the price of bubble gum is $0.60, the quantity demanded is500 packs per day. When the price falls to $0.50, the quantitydemanded increases to 900. The demand for gum would beconsidered:

a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.

20. Inefficient Production implies which of the following:

a. it is impossible to produce more of one good without producingless of another
b. there are too few resources
c. there are too many resources
d. it is possible to produce more of one good without producingless of another

21. Workers at a bicycle assembly plant currently make minimumwage. If the federal government increases the minimum wage by $1.00an hour it is likely that the

a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.

24. Suppose at a price of $5 and at a price of $9, John purchases40 units of good X. Given this information, we know that Johnâsdemand for good X is
a. perfectly elastic at all prices.
b. inelastic at all prices.
c. unit elastic between the prices of $5 and $9.
d. perfectly elastic between the prices of $5 and $9.
e. perfectly inelastic between the prices of $5 and $9.

25. If the price of good A decreases by 10 percent and the quantitydemanded of good B decreases by 10 percent, this is evidence that Aand B are
a. substitute goods.
b. complement goods.
c. inferior goods.
d. normal goods.
e. not related.

6. For an individual to achieve consumer equilibrium when consumingtwo goods, A and B, the individual must satisfy the followingcondition:

a. TUA = TUB
b. TUA/PA = TUB/PB
c. MUA = MUB
d. MUA/PA = MUB/PB
e. MUA/PB = MUB/PA

7. Which of the following statements is correct regarding a firm'sdecision making?
a. The decision to shut down and the decision to exit are bothshort-run decisions.
b. The decision to shut down and the decision to exit are bothlong-run decisions.
c. The decision to shut down is a short-run decision, whereas thedecision to exit is a long-run decision.
d. The decision to exit is a short-run decision, whereas thedecision to shut down is a long-run decision.

Table 1

Output Total Cost
0 $20
1 $30
2 $41
3 $51
4 $65
5 $75
6 $84
7 $105

13. Refer to Table 1. The marginal cost of producing the fifth unitof output is
a. $55.00
b. $15.00
c. $9.00
d. $10.00

21. A perfectly competitive firm can produce its current level ofoutput at an average total cost of $10 and a marginal cost of $8.If the market price of the product is currently $8, what should thefirm do?

a. The firm should definitely shut down since average total costexceeds price.
b. The firm should shut down if average variable cost is $8 orgreater, but the firm should continue to produce the current levelof output if average variable cost is less than $8.
c. The firm should increase production in order to increaseprofit.
d. The firm should continue to produce, but it should decreaseproduction in order to increase profit.
24. In the long run all costs are variable. Thus, aprofit-maximizing firm may exit:

a. When Price < Average Total Cost
b. When Price > Average Total Cost
c. When Average Revenue > Average Fixed Cost
d. When Average Revenue > Marginal Cost

25. Marginal cost tells us the
a. value of all resources used in a production process.
b. marginal increment to profitability when price isconstant.
c. amount by which total cost rises when output is increased by oneunit.
d. amount by which output rises when labor is increased by oneunit.

26. For a perfectly competitive firm:
a. marginal revenue is equal to price.
b. price is equal to marginal cost at the output level thatmaximizes profit.
c. selling an additional unit of the good it produces increasestotal revenue by the price of the good.
d. a and b
e. a, b, and c

Economics 1021A/B Lecture 16: Costs

ECON 1021A/B Full Course Notes

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