Econ 111: Principles of Economics - Accelerated Treatment - Problem Set 4
1. Use diagrams and explain whether the following statements are true or false:
a) When average product (AP) decreases, marginal product (MP) decreases also always.
b) An increase in costs of producing garbage bags by $0.07 per bag will increase the price of garbage bags by $0.07 per bag.
c) A firm will never sell its product for less than it costs to produce it.
2. The "Always Accurate" corporation produces pocket calculators using two pressing machines, which it cannot change in the short run. Each of the machines costs $100 per day (the opportunity cost of the funds to buy them). Each hired worker costs $50 per day. The relationship between output and the number of workers is as follows:
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Q
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L
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TFC
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TVC
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TC
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AFC
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AVC
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ATC
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MC
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0
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0
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1
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10
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2
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15
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3
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18
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4
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22
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5
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28
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6
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36
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7
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48
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a) Fill in the columns for total fixed cost (TFC), total variable cost (TVC), total cost (TC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC).
b) Verify that the two alternative methods of figuring ATC (TC/Q and AVC + AFC) give the same answer.
c) Over what range of output is marginal cost (i) decreasing? (ii) increasing?
d) At which level of output is AVC minimized? At which level is ATC minimized?
e) Suppose this firm operates in a perfectly competitive output market and can sell as many calculators as it wants for $410 each. In the short run, what is the profit-maximizing level of output for this firm?
f) Now assume that each one of the two pressing machines costs $120 (instead of $100) per day. Everything else remains exactly the same. Now what is the profit-maximizing level of output for the "Always Accurate" corporation?
3. Sam runs a fast food restaurant. Explain how each of the following would affect the marginal cost and the average cost of hamburgers at Sam's.
(a) The price of meat goes up.
(b) A new tax of $.20 per hamburger is imposed on all restaurants by the City of Boston.
(c) A safety code violation is discovered at Sam's, and OSHA (a federal agency) imposes a $500 fine on Sam's.
(d) Property taxes for businesses are raised by the City of Boston.
4. A wheat farm has very rich soil that requires little irrigation or care, while a neighboring wheat farm has a poor soil that requires constant intervention to produce wheat. Suppose that each farm is producing the profit-maximizing level of output. For which farm (if either) will the marginal cost of producing another bushel of wheat be higher? (Hint: Under what type of market structure is wheat sold?).