Deck 7: Production and Cost in the Firm

Question 1

MARGINAL COST Explain why the marginal cost of production must increase if the marginal product of the variable resource is decreasing.

Answer 1

Short-Run: Relationship between Marginal Cost and Marginal Product
Firm's marginal cost of production is negatively related to the marginal product of the firm in the short run.
In the short-run, fall in the marginal product of the variable factors of production implies that addition made to the total product from each additional unit of a variable factor is decreasing.In the short-run, the total output of a firm changes only with respect to variable factors of production.
The fall in the marginal product of the variable factors implies that the variable factors become costlier for the firm to employ in the production process. Thereby, the marginal cost of production will increase.

Question 2

COSTS IN THE SHORT RUN What effect would each of the following have on a firm's short-run marginal cost curve and its fixed cost curve?
a. An increase in the wage rate
b. A decrease in property taxes
c. A rise in the purchase price of new capital
d. A rise in energy prices

Answer 2

Factors affecting Short-run Cost Curves
a.An increase in the wage rate will cause the marginal cost curve to shift upward to the left. But an increase in wage rate will have no effect on fixed cost curve.
b.A decrease in property taxes will cause the fixed cost curve to shift downward. But it will have no impact on marginal cost curves.
c.A rise in the purchase price of new capital will cause an upward shift in the fixed cost curve. But it will have no impact on marginal cost curves.
d.A rise in the energy prices will cause the marginal cost curve to shift upward. But rise in energy prices will have no effect on fixed cost curve.

Question 3

Costs in the Short Run Identify each of the curves in the following graph:

Answer 3

Short-run Cost Curves:
The following figure shows short-run cost curves of a firm:
Figure: Short-run cost curves
In the above figure,
• Curve A is the short-run average variable cost curve
• Curve B is the short-run average total cost curve and
• Curve C is the short-run marginal cost curve
The average variable cost curve and average total cost curve first declines and then gradually rises up.
When the marginal cost is below the average variable cost or average total cost then, the average variable cost or average total cost is falling.When the marginal cost is equal to the average variable cost or average total cost then, the average variable cost or average total cost is at its minimum.
When the marginal cost is above the average variable cost or average total cost then, the average variable cost or average total cost is increasing.

Question 4

MARGINAL COST AND AVERAGE COST Explain why the marginal cost curve must intersect the average total cost curve and the average variable cost curve at their minimum points. Why do the average total cost and average variable cost curves get closer to one another as output increases?

Question 5

MARGINAL COST AND AVERAGE COST In Exhibit 7 in this chapter, the output level where average total cost is at a minimum is greater than the output level where average variable cost is at a minimum. Why?

Question 6

LONG-RUN AVERAGE COST CURVE What types of changes could shift the long-run average cost curve? How would these changes also affect the short-run average total cost curve?

Question 7

LONG-RUN AVERAGE COST CURVE Explain the shape of the long-run average cost curve. What does "minimum efficient scale" mean?

Question 8

Case Study: Scale Economies and Diseconomies At the Movies Concession stands account for well over half the profits at most theaters. Given this, what are the benefits of the staggered movie times allowed by multiple screens?

Question 9

SCALE ECONOMIES AND DISECONOMIES In analyzing scale economies and diseconomies, what's the difference between the plant level and the firm level?

Question 10

EXPLICIT AND IMPLICIT COSTS Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not?

Question 11

PRODUCTION IN THE SHORT RUN Complete the following table. At what point does diminishing marginal returns set in?

Question 12

EXPLICIT AND IMPLICIT COSTS Determine whether each of the following is an explicit cost or an implicit cost:
a. Payments for labor purchased in the labor market
b. A firm's use of a warehouse that it owns and could rent to another firm
c. Rent paid for the use of a warehouse not owned by the firm
d. The wages that owners could earn if they did not work for themselves

Question 13

TOTAL COST AND MARGINAL COST Complete the following table, assuming that each unit of labor costs $75 per day.

a. Graph the fixed cost, variable cost, and total cost curves for these data.
b. What is the marginal product of the third unit of labor?
c. What is average total cost when output is 18 units per day?

Question 14

ALTERNATIVE MEASURES OF PROFIT Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations:
a. A firm with total revenues of $150 million, explicit costs of $90 million, and implicit costs of $40 million
b. A firm with total revenues of $125 million, explicit costs of $100 million, and implicit costs of $30 million
c. A firm with total revenues of $100 million, explicit costs of $90 million, and implicit costs of $20 million
d. A firm with total revenues of $250,000, explicit costs of $275,000, and implicit costs of $50,000

Question 15

TOTAL COST AND MARGINAL COST Complete the following table, where L is units of labor, Q is the rate of output, and MP is the marginal product of labor.

a. At what level of labor input do the marginal returns from labor begin to diminish?
b. What is the average variable cost when Q = 24?
c. What is this firm's fixed cost?
d. What is the wage rate per day?

Question 16

ALTERNATIVE MEASURES OF PROFIT Why is it reasonable to think of normal profit as a type of cost to the firm?

Question 17

RELATIONSHIP BETWEEN MARGINAL COST AND AVERAGE COST Assume that labor and capital are the only inputs used by a firm. Capital is fixed at 5 units, which cost $100 each per day. Workers can be hired for $200 each per day. Complete the following table to show average variable cost ( AVC ), average total cost ( ATC ), and marginal cost ( MC ).

Question 18

SHORT RUN VERSUS LONG RUN What distinguishes a firm's short-run period from its long-run period?

Question 19

LONG-RUN COSTS Suppose the firm has only three possible scales of production as shown below:
a. Which scale of production is most efficient when Q = 65?
b. Which scale of production is most efficient when Q = 75?
c. Trace out the long-run average cost curve on the diagram.

Question 20

LAW OF DIMINISHING MARGINAL RETURNS As a farmer, you must decide how many times during the year to plant a new crop. Also, you must decide how far apart to space the plants. Will diminishing returns be a factor in your decision making? If so, how will it affect your decisions?

Question 21

CHOICE OF INPUT COMBINATIONS Suppose that a firm's cost per unit of labor is $100 per day and its cost per unit of capital is $400 per day.
a. Draw the isocost line for a total cost per day of $2,000. Label the axes.
b. If the firm is producing efficiently, what is the marginal rate of technical substitution between labor and capital?
c. Demonstrate your answer to part (b) using isocost lines and isoquant curves.

Question 22

MARGINAL COST What is the difference between fixed cost and variable cost? Does each type of cost affect short-run marginal cost? If yes, explain how each affects marginal cost. If no, explain why each does or does not affect marginal cost.

Question 23

THE EXPANSION PATH How are the expansion path and the long-run average cost curve related?