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ECON 200. Introduction to Microeconomics Homework 5 Part I

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ECON 200. Introduction to Microeconomics Homework 5 Part I Name:________________________________________ [Multiple Choice] 1. Diminishing marginal product explains why, as a firm’s output increases, (d) a. the production function and total-cost curve both get steeper. b. the production function and total-cost curve both get flatter c. the production function gets steeper, while the total-cost curve gets flatter. d. the production function gets flatter, while the total-cost curve gets steeper. 2. A firm is producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total cost would rise to $5,008. What does this information tell you about the firm? (d) a. Marginal cost is $5, and average variable cost is $8. b. Marginal cost is $8, and average variable cost is $5. c. Marginal cost is $5, and average total cost is $8. d. Marginal cost is $8, and average total cost is $5. 3. A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If it were to increase production to 21 units, which of the following must occur? (c) a. Marginal cost would decrease. b. Marginal cost would increase. c. Average total cost would decrease. d. Average total cost would increase 4. The government imposes a $1,000 per year license fee on all pizza restaurants. Which cost curves shift as a result? (b) a. average total cost and marginal cost b. average total cost and average fixed cost c. average variable cost and marginal cost d. average variable cost and average fixed cost 5. If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost. (a) a. economies, falling b. economies, rising c. diseconomies, falling d. diseconomies, rising 6. A perfectly competitive firm (c) a. chooses its price to maximize profits. b. sets its price to undercut other firms selling similar products. c. takes its price as given by market conditions. d. picks the price that yields the largest market share. 7. A competitive firm maximizes profit by choosing the quantity at which (b) a. average total cost is at its minimum. b. marginal cost equals the price. c. average total cost equals the price. d. marginal cost equals average total cost. 8. If profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will (a) a. keep producing in the short run but exit the market in the long run. b. shut down in the short run but return to production in the long run. c. shut down in the short run and exit the market in the long run. d. keep producing both in the short run and in the long run. 9. In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price P, marginal cost MC, and average total cost ATC? (d) a. P > MC and P > ATC. b. P > MC and P = ATC. c. P = MC and P > ATC. d. P = MC and P = ATC. [Short Answer] 1. Draw the marginal-cost and average-total-cost curves for a typical firm. Explain why the curves have the shapes that they do and why they cross where they do. The figure shows the marginal-cost curve and the average-total-cost curve for a typical firm. There are three main features of these curves: (1) marginal cost is U-shaped but rises sharply as output increases; (2) average total cost is U-shaped; and (3) whenever marginal cost is less than average total cost, average total cost is declining; whenever marginal cost is greater than average total cost, average total cost is rising. Marginal cost is increasing for output greater than a certain quantity because of diminishing returns. The average-total-cost curve is downward-sloping initially because the firm is able to spread out fixed costs over additional units. The average-total-cost curve is increasing beyond some output level because as quantity increases, the demand for important variable inputs increases; therefore, the cost of these inputs increases. The marginal-cost and average-total-cost curves intersect at the minimum of average total cost; that quantity is the efficient scale. 2. Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise. Economies of scale exist when long-run average total cost decreases as the quantity of output increases, which occurs because of specialization among workers. Diseconomies of scale exist when long-run average total cost rises as the quantity of output increases, which occurs because of the coordination problems inherent in a large organization 3. There are 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 for taking some action is called the ______. opportunity cost b. _____ is falling when marginal cost is below it and rising when marginal cost is above it. average total cost c. A cost that does not depend on the quantity produced is a(n) ______. fixed cost d. In the ice-cream industry in the short run, ______ includes the cost of cream and sugar but not the cost of the factory. variable cost e. Profits equal total revenue minus ______. total cost f. The cost of producing an extra unit of output is the ______. marginal cost 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 in a given day: 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. Fill in the column of marginal products. What pattern do you see? How might you explain it? Marginal product rises at first, then declines because of diminishing marginal product. 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 ATC=TC/Q.) What pattern do you see? 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. Now fill in the column for marginal cost. (Recall that MC=dTC/dQ.) What pattern do you see? Marginal cost is also U-shaped, but rises steeply as output increases. This is due to diminishing marginal product e. Compare the column for marginal product and the column for marginal cost. Explain the relationship. When marginal product is rising, marginal cost is falling, and vice versa f. Compare the column for average total cost and the column for marginal cost. Explain the relationship. 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 pushes the average up 5. You are the chief financial officer for a firm that sells digital music players. Your firm has the following average-total-cost schedule: Quantity Average Total Cost 600 players $300 601 301 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? At an output level of 600 players, total cost is $180,000 (600 × $300). The total cost of producing 601 players is $180,901. Therefore, you should not accept the offer of $550, because the marginal cost of the 601st player is $901 6. Consider the following cost information for a pizzeria: Quantity TotalCost Variable Cost 0 dozen pizzas $300 $0 1 350 50 2 390 90 3 420 120 4 450 150 5 490 190 6 540 240 a. What is the pizzeria’s fixed cost? The fixed cost is $300, because fixed cost equals total cost minus variable cost. At an output of zero, the only costs are 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? Comment Quantity Total Variable Marginal Cost Marginal Cost Cost Cost (using total cost) (using variable cost) 0 $300 $0 --- --- 1 350 50 $50 $50 2 390 90 40 40 3 420 120 30 30 4 450 150 30 30 5 490 190 40 40 6 540 240 50 50 Marginal cost equals the change in total cost for each additional unit of output. It is also equal to the change in variable cost for each additional unit of output. This relationship occurs because total cost equals the sum of variable cost and fixed cost and fixed cost does not change as the quantity changes.
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