Production and Inputs
What distinguishes the short run from the long run in terms of a firm’s inputs?
In the short run, at least one input is fixed.
A closed workshop produces nothing today. Its only costs are unavoidable rent of $72 and insurance of $18. Calculate FC, VC, and TC.
FC = $72 + $18 = $90; VC = $0; TC = $90. The fixed obligations remain payable at zero output.
An owner gives up a salary to run a business. Is that forgone salary explicit or implicit? Is it deducted when calculating accounting profit, economic profit, or both?
It is an implicit cost. Deduct it for economic profit, but not for accounting profit.
Identify three characteristics of a perfectly competitive market.
Any three: many small firms; identical products; low barriers to entry and exit; firms are price takers.
An economy puts unemployed workers back to work. Its resources and technology are unchanged. Is this a movement toward its PPC or an outward shift of the PPC?
A movement from inside toward the existing PPC. Resources are used more fully; productive capacity has not increased.
Classify each cost as fixed or variable: a daily equipment lease; a guaranteed daily manager salary; ingredients purchased per item; packaging purchased per item.
Fixed: the equipment lease and guaranteed manager salary.
Variable: ingredients and packaging. Classification depends on whether the cost changes with output.
Total cost rises from $510 to $750 as output rises from 30 to 50 units. Calculate MC over this output increase.
MC = ($750 − $510) ÷ (50 − 30) = $240 ÷ 20 = $12 per additional unit.
Monthly revenue is $24,000, explicit costs are $15,000, and implicit costs are $5,000. Calculate accounting profit and economic profit.
Accounting profit = $24,000 − $15,000 = $9,000. Economic profit = $24,000 − $15,000 − $5,000 = $4,000.
The market price is $16. What shape and value does an individual firm’s demand/MR line have? Explain why that firm cannot successfully charge $17.
A horizontal line at $16: D = MR = AR = P. Buyers can purchase an identical product from other firms for $16.
Tea and coffee are substitutes. The price of tea rises. In the coffee market, is this a change in demand or quantity demanded? State the direction.
Demand for coffee increases: its demand curve shifts right. The change is caused by another good’s price, not coffee’s own price.
Four workers produce 56 crates per day; five workers produce 65. Calculate the fifth worker’s marginal product and average product with five workers.
MP of the fifth worker = (65 − 56) ÷ (5 − 4) = 9 crates.
AP with five workers = 65 ÷ 5 = 13 crates per worker.
At 40 units, FC is $120 and VC is $360. Calculate TC, AFC, AVC, and ATC.
TC = $480; AFC = $120 ÷ 40 = $3; AVC = $360 ÷ 40 = $9; ATC = $480 ÷ 40 = $12.
A perfectly competitive firm’s rising MC crosses MR = $18 at 50 units per day. ATC there is $14. Identify the profit-maximizing output and calculate daily economic profit.
Produce 50 units, where MR = MC. Daily economic profit = ($18 − $14) × 50 = $200.
At a firm’s profit-maximizing output of 100 units, P = $18 and ATC = $13. Describe the boundaries of the shaded profit rectangle and calculate total economic profit.
Shade from 0 to 100 units horizontally and from $13 to $18 vertically. Profit = ($18 − $13) × 100 = $500, not total revenue.
In one day, A can produce 30 mugs or 15 bowls; B can produce 24 mugs or 24 bowls. Opportunity costs are constant. Calculate each producer’s cost of one bowl and identify comparative advantage in bowls. Would trading one bowl for 1.5 mugs benefit both?
One bowl costs A 2 mugs and B 1 mug. B has comparative advantage in bowls. Yes: 1.5 mugs per bowl lies between their opportunity costs of 1 and 2 mugs.
More workers use unchanged equipment. MP falls but remains positive. Name the stage of returns and describe total product and MC. Labor is the only variable input, and wages are unchanged.
Decreasing (diminishing) marginal returns. Total product increases at a decreasing rate. MC rises because the same additional wage buys fewer additional units of output.
At the current output, MC is $18, AVC is $14, and ATC is $22. Is each average cost rising or falling? Explain.
AVC rises because MC is above AVC. ATC falls because MC is below ATC. Compare MC with each average, not with its previous value.
At its best positive output of 100 units, a firm has P = $9, AVC = $7, and ATC = $12. Should it produce or shut down? Calculate its loss under each choice.
Produce. Operating loss = ($12 − $9) × 100 = $300. Shutdown loss = FC = ($12 − $7) × 100 = $500. Producing covers VC and some FC.
A firm produces where P = MC = minimum ATC = $12. Name the two types of efficiency it achieves and identify its economic profit.
Productive efficiency: production at minimum ATC. Allocative efficiency: P = MC. Economic profit is zero (normal profit), since P = ATC.
A 10% price increase causes quantity demanded to fall 20%. Calculate the absolute value of PED, classify demand, and state what happens to total revenue.
PED = 20% ÷ 10% = 2: elastic demand. Total revenue falls because quantity demanded falls proportionally more than price rises.
A factory doubles every input, and output rises from 150 to 360 units. Identify its returns to scale. Why is this not an example of diminishing marginal returns?
Increasing returns to scale: output more than doubles (360 exceeds 300). All inputs change; diminishing marginal returns concerns adding a variable input while other inputs remain fixed.
A profit-maximizing competitive firm produces 75 units daily. In the short run, daily rent rises by $300; market price is unchanged and the firm stays open. Which of MC, AVC, AFC, and ATC shift? Calculate the average-cost changes at 75 units and explain the effects on output and total profit.
AFC and ATC rise by $300 ÷ 75 = $4 at 75 units. MC and AVC do not shift. Profit-maximizing output stays at 75; daily profit falls by $300.
For a perfectly competitive firm, market price stays at $20. Its rising MC equals $16 at 40 units, $20 at 50, and $24 at 60. Separately apply a $4 per-unit tax and a $4 per-unit subsidy. For each, identify the new output and shifts in MC, AVC, ATC, and AFC. Treat the subsidy as a cost reduction; the firm stays
Tax: produce 40; adjusted MC = $16 + $4 = $20. Subsidy: produce 60; net MC = $24 − $4 = $20. MC, AVC, and ATC shift up $4 with the tax and down $4 with the subsidy. AFC does not shift; MR stays at $20.
Identical firms earn positive economic profit. Demand and firms’ cost curves remain unchanged. Use side-by-side sketches to show the long-run adjustment. Explain market supply, price, total market output, each existing firm’s MR and output, and the final profit outcome.
Market supply shifts right; demand stays fixed. Market price falls and total market output rises. Each firm’s horizontal MR falls, reducing its output along unchanged MC. Entry ends at P = MR = MC = minimum ATC. Firms earn zero economic profit (normal profit), with no incentive to enter or exit. Sketch both supply curves, both MR lines, and the initial and final quantities.
Electric bicycles become more popular while the cost of batteries used to make them rises. Identify both curve shifts. What must happen to equilibrium price, and what can you conclude about equilibrium quantity?
Demand shifts right and supply shifts left. Both raise price, so equilibrium price rises. Quantity is indeterminate because the two shifts have opposite effects on it.