ECON 262

In Class Exercise Fifteen – The Theory of the Firm - Costs, Product, and Revenue Concepts

 

Note:  TVC - Total Variable Costs, TFC = Total Fixed Costs, TC = Total Costs, ATC = Average Total Cost, AVC = Average Variable Cost, AFC = Average Fixed Cost, MC = Marginal Cost,

TR = Total Revenue, AR = Average Revenue, MR = Marginal Revenue

 

 

1.  If Total Variable Costs (TVC) = 400 and Total Fixed Costs (TFC) = 300 when a firm makes 30 units:

 

 

    a.  what are Total Costs (TC)? 

 

 

    b.  what are Average Total Costs (ATC)? 

 

 

    c.  what are Average Variable Costs (AVC)?  

 

 

    d.  what are Average Fixed Costs (AFC)? 

 

 

    e.  if Total Costs (TC) = 740 when the firm makes 31 units, what is the Marginal Cost (MC)?

 

 

2.  Fill in all of the blanks in the table:

 

Inputs (workers) Total Product Marginal Product
0 0 0
1 22  
2    
3 48 10
4 56  
5    
6 56 -4

 

3.  With which worker did diminishing marginal returns (or product) set in (in question #2)?  _______ 

 

 

4.  If the selling price of the good produced in question #2 is $2 per good, what is the marginal revenue product of the 2nd worker hired?

 

 

 

 

5.  If a firm sells every unit for $5 and it sells 500 units:

   a.  What is Total Revenue (TR)? 

 

   b.  What is Average Revenue (AR)? 

 

   c.  What is Marginal Revenue (MR)? 

 

 

6.  At what level of output (theoretically) should a firm produce if it wants to maximize profit (or minimize loss). 

 

  

    a.  If Marginal Cost (MC) is greater than Marginal Revenue (MR), should the firm increase or decrease production?  Explain.  

 

 

    b.  If Marginal Cost (MC)  is less than Marginal Revenue (MR), should the firm increase or decrease production?  Explain.  

 

 

 

7.  If Average Total Cost (ATC) = $8 and Average Revenue (AR) = $10 when the firm is producing 100 units:

    a.  What is Total Cost?  

 

    b.  What is Total Revenue? 

 

    c.  Is the firm making an economic loss or profit? By how much?

 

 

8.  If a firm is making a zero economic profit, is it still making money?  Explain.

 

 

 

 

 

 

9.  Using the graph below and assume P = $12, C = $9, Q = 10,000.

a.  Is this firm making an economic profit or loss? 

 

b.  How much economic profit or loss is the firm making (in $ terms - show work)? 

 

c.  Shade in (on this graph) the economic profit or loss. 

 

 File:Profit max marginal small.png

 

d.  Will firms exit or enter this industry? Explain why using the concept of opportunity cost.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.  Assume:  Every unit of the good is sold for the same price.

 

Draw the following graph:  All goods are sold for $10.  The firm will operate at 1,000 units.  The ATC curve lies below the price at 1,000 units by $3 (so $3 below $10).  Make sure you label:  MR, MC, ATC, AR curves correctly.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11.  In the above problem, price = _____________________, which also = ___________________  (your answers should not be numbers).

 

 

12.  Why is the firm operating at 1,000 units?   Explain.

 

 

 

 

 

 

 

13.  From your graph above, determine:

 

a.  Total Revenue (show your work):

 

 

 

b.  Total Cost (show your work):

 

 

 

c.  Is the firm making an economic profit or loss?  Explain.  Shade in the economic profit or loss on the graph.

 

 

 

 

d.  What will happen in this market and why?

 

 

 

 

 

 

 

14.  What questions do you still have about this material?