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ECON 1B03 (303)
Chapter 13

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Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes
Semester
Winter

Description
THE COSTS OF PRODUCTION 13 Problems and Applications 1. a. opportunity cost; b. average total cost; c. fixed cost; d. variable cost; e. total cost; f. marginal cost. 2. a. The opportunity cost of something is what must be forgone to acquire it. b. The opportunity cost of running the hardware store is $550,000, consisting of $500,000 to rent the store and buy the stock and a $50,000 opportunity cost, since opportunity cost of $550,000 exceeds revenue of $510,000, your aunt should notl open the store, as her profit would be negativeshe would lose money. 3. a. The lump sum tax is a fixed cost for any producer who chooses to remain in business for the year. The average fixed cost and average total cost curves shift. Figure 7 shows these changes. 236 237 ✦ Chapter 13/The Costs of Production Costs ATC 2 ATC 1 AFC 2 AFC 1 Quantity of Hamburgers Figure 7 b. The per-unit tax increases both marginal and average variable costs. Figure 8 shows the shifts in the two curves. Chapter 13/The Costs of Producti✦n 238 Costs MC 2 AVC2 MC 1 AVC1 $1 Quantity of Hamburgers Figure 8 4. a. The following table shows the marginal product of each hour spent fishing: Hours Fish Fixed Cost Variable Cost Total Cost Marginal Product 0 0 $10 $0 $10 --- 1 10 10 5 15 10 2 18 10 10 20 8 3 24 10 15 25 6 4 28 10 20 30 4 5 30 10 25 25 2 b. Figure 9 graphs the fisherman's production function. The production function becomes flatter as the number of hours spent fishing increases, illustrating diminishing marginal product. Figure 9 239 ✦ Chapter 13/The Costs of Production c. The table shows the fixed cost, variable cost, and total cost of fishing. Figure 10 shows the fisherman's total-cost curve. It slopes up because catching additional fish takes additional time. The curve is convex because there are diminishing returns to fishing timeeach additional hour spent fishing yields fewer additional fish. Figure 10 5. Here is the table of costs: Workers Output Marginal Total Average Marginal Product Cost Total Cost Cost 0 0 --- $200 --- --- 1 20 20 300 $15.00 $5.00 2 50 30 400 8.00 3.33 3 90 40 500 5.56 2.50 4 120 30 600 5.00 3.33 5 140 20 700 5.00 5.00 6 150 10 800 5.33 10.00 7 155 5 900 5.81 20.00 a. See table for marginal product. Marginal product rises at first, then declines because of diminishing marginal product. b. See table for total cost. c. See table for average total cost. Average total cost is U-shaped. When quantity is low, average total cost declines as quantity rises; when quantity is high, average total cost rises as quantity rises. d. See table for marginal cost. Marginal cost is also U-shaped, but rises steeply as output increases. This is due to diminishing marginal product. e. When marginal product is rising, marginal cost is falling, and vice versa. f. When marginal cost is less than average total cost, average total cost is falling; the cost of the last unit produced pulls the average down. When marginal cost is greater than average total cost, average total cost is rising; the cost of the last unit produced Chapter 13/The Costs of Productio✦ 240 pushes the average up. Marginal cost equals average total cost at minimum average total cost. 6. a. See table for total cost. Since average variable cost = 5Q, total variable cost = 5Q . Total cost = $100 + 5Q . Output Total Total Variable Total Average Marginal Fixed Cost Cost Total Cost Cost Cost 0 $100 $0 $100 - - 1 100 5 105 $105 $5 2 100 20 120 60 15 3 100 45 145 48.3 25 4 100 80 180 45 35 5 100 125 225 45 45 6 100 180 280 46.7 55 7 100 245 345 49.3 65 8 100 320 420 52.5
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