Out of Class Practice Problems  - Theory of the Firm

Economic Profit and Loss 

Graph:

Draw a graph with the following information curves (or schedules):

Average revenue curve (AR)

Marginal revenue curve (MR)

Marginal cost curve (MC)

Average total cost curve (ATC)

Use the information below: 

Every unit of the good is sold for the same price = $12.

The firm is operating 1000 units and that is “best” level of output with respect to profit/loss.

The MINIMUM point on the ATC curve intersects the MC curve at an output level of 1200 units with an ATC of $13.50.  At 1,000 units, ATC = $13.75.

From your above graph, determine:

Total Revenue:  $                                (Where is this on your graph?)

Total Cost: $                                       (Where is this on your graph?)

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

Shade in the economic profit or loss on the graph.

What will happen in this market and why?

Out of Class  - Theory of the Firm Practice Problems

Economic Profit and Loss

Answers

Total Revenue:  $12 x 1000 = $12,000

Total Cost: $13.75 x 1000 = $13,750

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

The firm is making an economic loss of $1,750 (the difference between total revenue and total cost).  An economic loss means that the firm is making $1,750 less than what the owners could have made in their next best alternative.

What will happen in this market and why? 

Firms will exit this industry.  As firms exit the industry, supply will go down and this will increase price (ceteris paribus) until the remaining firms in the industry are no longer making an economic loss.  Firms will exit because they could be making a higher profit elsewhere (opportunity cost).

Out of Class  - Theory of the Firm Practice Problems

Cost and Product Concepts 

1.      If TC (Total Cost) = 180 and the number of units produced (Q) = 12, what is the per unit cost (or ATC)?

2.      If TP (Total Product) = 50,000 units when 100 inputs are employed, what is the average product of the input?

3.      If TVC (Total Variable Cost) = 400 and TFC (Total Fixed Cost) = 800, what is Total Cost (TC)?  

4.     Fill in all of the blanks in the table:  (hint:  you might have to work backwards) 

5.      If the marginal product of Bob = 3 units of output/hour and the output is sold for $2, what is Bob's marginal revenue product?  Show work.

Use the table below to answer the next two questions.  You might need to fill in some of the blanks to answer the questions!!

6.     In the following table, with which work does diminishing marginal returns (or product) set in?

7.  If worker #3 is paid $50 per day and each unit of output is sold for $1.75, should worker #3 remain employed?  Explain with words and numbers.

Out of Class  - Theory of the Firm Practice Problems

Cost and Product Concepts 

Answers

1.      If TC (Total Cost) = 180 and the number of units produced (Q) = 12, what is the per unit cost (or ATC)? ___180/12 = 15___________________

2.      If TP (Total Product) = 50,000 units when 100 inputs are employed, what is the average product of the input? ___50,000/100 = 500______________

3.      If TVC (Total Variable Cost) = 400 and TFC (Total Fixed Cost) = 800, what is Total Cost (TC)?   __400 + 800 = 1200_

4.     Fill in all of the blanks in the table: (4 pts.) (hint:  you might have to work backwards) 

5.      If the marginal product of Bob = 3 units of output/hour and the output is sold for $2, what is Bob's marginal revenue product?  Show work. MP x P so it is 3 x 2 = $6

Use the table below to answer the next two questions.  You might need to fill in some of the blanks to answer the questions!!

6.  In the following table, with which work does diminishing marginal returns (or product) set in? ______5th______ (1 pt.)

7.  If worker #3 is paid $50 per day and each unit of output is sold for $1.75, should worker #3 remain employed?  Explain with words and numbers.(2 pts.)  Determine marginal revenue product = $1.75 x 32 = $56.  Since he is bringing in more than his wage, yes, should hire him.