Exam 8: B: Costs and the Supply of Goods

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The AB Manufacturing Company has hired an economist to evaluate its financial situation. She explains to the board of directors that the company is making zero economic profit. Should the company go out of business?

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Question 1

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The company should remain operating. Earning zero economic profit implies that the firm has an accounting profit equal to what the firm could be making at its highest valued alternative. A situation where zero economic profit is made would be considered normal.

The boss observes that her 10 workers produce 1,000 widgets a day. She concludes that she can employ 20 workers and make 2,000 widgets, 30 to make 3,000, or 40 to make 4,000. Explain why this observation is either correct or incorrect.

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Question 2

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She is most likely incorrect because of the law of diminishing returns. Adding more and more of a variable resource (labor) to a fixed resource (the factory and machinery) should cause output to increase, but at a decreasing rate. If the company is experiencing diminishing returns, we might expect something like 20 workers producing 1,800 units, 30 producing 2,500 units, and 40 producing 3,300 units.

Mr. Jones pays his employees by the hour. He believes they purposely work slowly to maximize their personal satisfaction. What can he do to provide them with a stronger incentive to work efficiently?

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Mr. Jones needs to do something that would change worker incentives. One option would be to link pay to output or to the firm's profitability. He could pay bonuses for increased output, or he might tie all employee income to the profit the firm earns. This would make the employees residual claimants, giving them a stake in the firm's well-being.

James opened a baseball manufacturing operation, and initially the more balls he made, the lower the per-unit cost. Now, as output expands, his per-unit costs are rising. He concludes that diseconomies of scale have set in. Is he correct? Why?

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Question 4

Kim used to work at "The Big One" accounting firm, and she earned $50,000 a year. She saved her money and has now invested $100,000 in her own firm. Profit is $20,000 a year, which Kim receives as her only compensation. She concludes that this is great because a 20 percent return is much better than the 8 percent she could get in another investment (the opportunity cost of the funds). What is wrong with this line of thinking?

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Question 5

Andy wants to maximize his grade-point average. Having spent six hours studying for his final exam in economics, Andy calculates his grade and discovers that even with a perfect score on the final, he will not pass the course. He decides to study two more hours so he will not have wasted the first six hours. Is this a good decision? Why or why not?

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Question 6

Suppose you are planning to open a lemonade stand. List separately all the explicit and implicit costs that might be involved.

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Question 7

If the ABC Company decides to take over the XYZ Corporation by purchasing all of the stock of XYZ, what does this tell us about the view ABC holds of XYZ?

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Question 8

Showing 1 - 8 of 8

The AB Manufacturing Company has hired an economist to evaluate its financial situation. She explains to the board of directors that the company is making zero economic profit. Should the company go out of business?

The boss observes that her 10 workers produce 1,000 widgets a day. She concludes that she can employ 20 workers and make 2,000 widgets, 30 to make 3,000, or 40 to make 4,000. Explain why this observation is either correct or incorrect.

Mr. Jones pays his employees by the hour. He believes they purposely work slowly to maximize their personal satisfaction. What can he do to provide them with a stronger incentive to work efficiently?

James opened a baseball manufacturing operation, and initially the more balls he made, the lower the per-unit cost. Now, as output expands, his per-unit costs are rising. He concludes that diseconomies of scale have set in. Is he correct? Why?

Suppose you are planning to open a lemonade stand. List separately all the explicit and implicit costs that might be involved.

If the ABC Company decides to take over the XYZ Corporation by purchasing all of the stock of XYZ, what does this tell us about the view ABC holds of XYZ?

The Economic Approach

A: Some Tools of the Economist

B: Some Tools of the Economist

A: Supply, Demand, and the Market Process

B: Supply, Demand, and the Market Process

A: Supply and Demand: Applications and Extensions

B: Supply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Consumer Choice and Elasticity

A: Costs and the Supply of Goods

A: Price Takers and the Competitive Process

B: Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A: Price-Searcher Markets With High Entry Barriers

B: Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Appendix: Government Spending and Taxation

Appendix: the Economics of Social Security

Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Appendix: Great Debates in Economics: Keynes Versus Hayek

Appendix: the Crisis of 2008: Causes and Lessons for the Future

Appendix: Lessons From the Great Depression

Appendix: the Economics of Healthcare

Appendix:education: Problems and Performance

Appendix: Earnings Differences Between Men and Women

Appendix: the Question of Resource Exhaustion

Appendix: Do Labor Unions Increase the Wages of Workers

Appendix: Difficult Environmental Cases and the Role of Government

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