In Class Exercise Ten - Answers in Red

 

 

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 TVC = 400 and TFC = 300 when a firm makes 30 units:

    a.  what are TC?  400 + 300 = 700

    b.  what are ATC? 700/30 = 23.33

    c.  what are AVC? 400/30 = 13.33

    d.  what are AFC? 300/30 = 10

    e.  if TC = 740 when the firm makes 31 units, what is MC?  740-700 = 40

 

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

 

Inputs (workers) Total Product Marginal Product
0 0 0
1 22 22
2 38 16
3 48 10
4 56 8
5 60 4
6 56 -4

 

3.  With which worker did diminishing marginal returns (or product) set in (in question #2)?  ___2nd_____ 

 

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? $2 x 16 = $32

 

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

   a.  What is TR? 500 x $5 = $2,500

   b.  What is AR? $5

   c.  What is MR? $5

 

6.  At what level of output (theoretically) should a firm produce if it wants to maximize profit (or minimize loss).  Explain!!  The firm should produce the output level where MR = MC.  Why?  Because prior to that output level MR > MC so the firm would lose revenue if it stopped before MR = MC, and after that point MC > MR so the firm would be losing money on each unit sold.

 

    a.  If MC is greater than MR, should the firm increase or decrease production?  Explain.  Decrease

    b.  If MC is less than MR, should the firm increase or decrease production?  Explain.  

Increase

 

7.  If ATC = $8 and AR = $10 when the firm is producing 100 units:

    a.  What is total cost?  $8 x 100 = $800

    b.  What is total revenue? $10 x 100 = $1,000

    c.  Is the firm making an economic loss or profit?  $1,000 - $800 = $200 econ. profit

 

8.  If a firm is making a zero economic profit, is it still making money?  Explain. Yes, just making its opportunity cost.

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

a.  Is this firm making an economic profit or loss? Profit - its ATC is below its price or AR at the profit maximizing level of output.

b.  How much economic profit or loss is the firm making (in $ terms - show work)?  $120,000 - $90,000 = $30,000 economic profit

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.  Enter.  An economic profit means that this firm is making more than its opportunity cost (another industry).  So other firms from that industry will move into this industry, hoping to capture a higher profit.  This entry will increase competition and supply, driving down price, until the firms in this market are back to zero economic profit (or so the theory goes).