1. a – opportunity cost b – atc c- fixed costs d- variable costs e- total costs f- ...
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CH. 13 COST OF PRODUCTION: PROBLEMS AND APPLICATIONS: 1-5 1. a – Opportunity cost B – ATC C- Fixed Costs D- Variable costs E- Total Costs F- Marginal Costs
2. Cost $500,000 / year rent and stock Quit $50,000 accounting job A – Define O.C. – Whatever must be given up to obtain some
item B- O.C. of running hardware store for year $550,000 ($500,000 for rent + $50,000 salary
given up)
Thought she could sell $510,000 in merchandise in year, should she open store?
She should NOT open the store because she would earn an economic profit of $ - 40,000 (or loss of $40,000) TR $510,000 – TC $550,000 = Profit of –
$40,000 Bonus – accounting profit? TR $510,000 - TC $500,000 = $10,000 Profit
3. College charges separately for tuition, and room/board
A. what is a cost of college that is not OC? Room and Board are NOT opportunity costs of
going to college because you would have to pay to live and eat somewhere anyways (even if at your parents house)
B Explicit O.C.? Tuition C. Implicit O.C.? giving up a job (salary) now in order to get
education
4. Hours Q Fish (lbs.) 0 01 102 183 244 285 30
a. MP of each hour spent
MP 108642
4b Graph the production function Explain its shape As input increases (hours), the output
(fish) increases but at a slower rate = DMP
4C FIXED COST ($10 POLE) AND OC OF TIME IS $5/HOUR – GRAPH TOTAL COST CURVE
Hours Fish FC VC TC
0 0 10 0 10
1 10 10 5 15
2 18 10 10 20
3 24 10 15 25
4 28 10 20 30
5 30 10 25 35
Explain its shape
As the slope gets steeper – it illustrates that each additional hour adds to the total cost at a constant rate of +5, but the output is increasing at a diminishing rate = DMP
From table : make columns for FC, VC, TC
5. a Fill in MP, what pattern do you see? Explain it
Workers Q MP
0 0 --
1 20 20
2 50 30
3 90 40
4 120 30
5 140 20
6 150 10
7 155 5
MP starts off rising and then with the 4th worker, MP begins to fall = DMP
B. worker costs $100/day, and FC $200. Fill in TC
C. fill in ATC, what pattern do you see? Workers
Q MP TC ATC
0 0 -- 200 --
1 20 20 300 15
2 50 30 400 8
3 90 40 500 5.56
4 120 30 600 5
5 140 20 700 5
6 150 10 800 5.33
7 155 5 900 5.81
ATC starts falling and then with the 6th unit begins to rise again
D. fill in MC. What pattern do you see? =
Workers
Q MP TC ATC MC
0 0 -- 200 -- --
1 20 20 300 15 5
2 50 30 400 8 3.33
3 90 40 500 5.56 2.5
4 120 30 600 5 3.3
5 140 20 700 5 5
6 150 10 800 5.33 10
7 155 5 900 5.81 20
MC is falling and then with the 4th worker , MC begins rising again ……due to increasing MP and then Decreasing MP
E. compare MP and MC – Explain relationship
As MP rises, MC falls As MP falls, MC risesWorker
sQ MP TC ATC MC
0 0 -- 200 -- --
1 20 20 300 15 5
2 50 30 400 8 3.33
3 90 40 500 5.56 2.5
4 120 30 600 5 3.3
5 140 20 700 5 5
6 150 10 800 5.33 10
7 155 5 900 5.81 20
F. compare MC and ATC- Explain relationship
As MC < ATC, ATC is falling As MC > ATC, ATC is rising MC crosses ATC at min (= efficient
scale) Workers
Q MP TC ATC MC
0 0 -- 200 -- --
1 20 20 300 15 5
2 50 30 400 8 3.33
3 90 40 500 5.56 2.5
4 120 30 600 5 3.3
5 140 20 700 5 5
6 150 10 800 5.33 10
7 155 5 900 5.81 20