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Chapter 11 Homework

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1What is technology? Technology isThe processes a firm uses to turn inputs into outputs of goods and services.
When we use the term "technology" in everyday language, we usually refer to the deveopment of new products. From an economic perspective, "technology" has a broader definition.
2An example of technological change isall of the above.
1. The ability to produce more output using the same inputs or the same output using fewer inputs.
2. Alternatively, quantity of output that can be produced from a given quantity of inputs declines.
3Suppose a pizza parlor has the following production costs: $4.00 in labor per pizza, $3.00 in ingredients per pizza, $0.10 in electricity per pizza, $4,000 in restaurant rent per month, and $550 in insurance per month. Assume the pizza parlor produces 5,000 pizzas per month. What is the variable cost of production (per month)?
4What is the fixed cost of production (per month)?
5Variable cost (VC):Variable costs are those costs that change as output changes.
6Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $4,000, buys gasoline ($1.70 in gas is required to mow each yard), and pays a helper $25.00 per yard. Prior to opening the lawn company, Charles earned $5,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 1 percent per year in the bank and that the mowing equipment depreciates at 20 percent per year. Charles plans to mow 500 yards per year. What is Charles's implicit cost of production?
7Implicit costA nonmonetary opportunity cost.
8Consider a production process where flowers are grown (the output) using gardeners (labor) and greenhouses (capital). The quantity of flowers grown per day with various combinations of labor and capital are shown in the table below. Suppose that each gardener is paid $250 per day and the greenhouse is rented for $500 per day. Fill in total cost in the table below. (Enter your responses as integers.)
9Next, fill in average total cost in the table. (Enter your responses as real numbers rounded to two decimal places.)
10Tables for previous
11What is the production function? The production function is the relationship betweenThe relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
12What is the difference in the short run and the long run? In the short run,at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.
Short run: The period of time during which at least one of a firm's inputs is fixed.
Long run: The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.
13Suppose that last semester your semester GPA was 3.60 and your resulting cumulative GPA was 2.82. Next, suppose that this semester your semester GPA will be 3.50. If so, then your cumulative GPAwill increase because your "marginal" GPA will be above your cumulative GPA.
Marginal product and average product: Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing. Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing.
This is because the average product of labor equals the average of the marginal products of labor.
The relationship between the marginal product of labor and the average product of labor is the same as the relationship between the marginal and average values of any variable such as your "marginal" GPA and your cumulative GPA. Therefore, since your "marginal" GPA will be above your cumulative GPA, your cumulative GPA will increase.
14Consider a firm that hires workers to mow lawns. The figure shows the number of lawns mowed per day for up to four workers. 1.) Use the point drawing tool to indicate the marginal product of each worker. Properly label the points (MP 1, MP 2, MP 3, MP 4). 2.) Use the multipoint curved line drawing tool to connect the four points. Label your curve 'MPL'The marginal product of the first worker is 3 yards mowed: (3 yards with one worker minus 0 yards without workers).
The marginal product of the second worker is 4 yards mowed: (7 yards with two workers minus 3 yards with one worker).
The marginal product of the third worker is 3 yards.
The marginal product of the fourth worker is 2 yards.
15Marginal Product of LaborThe additional output a firm produces as a result of hiring one more worker.
16Consider a production process where flowers are grown (the output) using gardeners (labor) and greenhouses (capital). The quantity of flowers grown per day with various combinations of labor and capital are shown in the table. Fill in the marginal product of labor in the table.
17Does the production of flowers experience the effects of the law of diminishing returns? The effects of the law of diminishing returnsare experienced when the third worker is hired.
The marginal product of labor first declines when the third worker is hired, and the marginal product of labor falls from 320 flowers for the second worker to 160 flowers for the third worker.
18Law of diminishing returnsThe principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
19Suppose Charles owns a lawn-mowing company. Assume that without workers, no yards are mowed. When he hires one worker, he is able to mow 5 yards per day. With two workers, he can mow 12 yards per day, and with three workers, he can mow 20 yards per day. The marginal product of the first worker is __ yards per day. The marginal product of the second worker is __ yards per day. Last, the marginal product of the third worker is __ yards per day. The marginal product of labor potentially increases (from one to three workers) due to ____.5
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specialization.
By dividing tasks to be performed—division of labor—Charles, for example, potentially reduces the time workers lose by moving from one activity to the next and allows them to become more specialized at their task.
20Specialization and division of labor:Increases in marginal products results from the division of labor and from specialization.
21Which of the following is true of the relationship between the average product of labor and the marginal product of labor?Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.
Average product of labor: The total output produced by a firm divided by the quantity of workers.
Marginal product of labor: The additional output a firm produces as a result of hiring one more worker.
As a result, the average product of labor is the average of the marginal products of labor.
Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.
Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing.
Therefore, the marginal product of labor equals the average product of labor for the quantity of workers where the average product of labor is at its maximum.
22The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve isa U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
Marginal Product and Marginal Cost: When the marginal product of labor is rising, the marginal cost of production is falling. When the marginal product of labor is falling, the marginal cost of production is rising.
We can conclude that the marginal cost of production falls and then rises—forming a U shape—because the marginal product of labor rises (due to specialization and division of labor) and then falls (due to diminishing returns).
The relationship between marginal cost and average cost follows the usual relationship between marginal and average values: When marginal cost is below average total cost, average total cost falls. When marginal cost is above average total cost, average total cost rises.
23How can marginal cost be expressed mathematically? Marginal cost (MC) can be expressed as
24For example, if the total cost of producing three units of output is $2,221 and the total cost of producing four units of output is $3,044, then the marginal cost of the fourth unit is $__. (Enter your response as an integer.)Marginal cost (MC): The change in a firm's total cost (TC) from producing one more unit of a good or service.
Therefore, the marginal cost of the fourth unit of output equals the difference between the (TC) of producing four units of output, ($3,044), and the (TC) of producing three units of output, ($2,221).
25When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increased to $9.4 million. Within this range, the marginal cost of an additional unit of output is$145.
26The figure to the right illustrates the short-run cost curves for a company that produces cell phones. Identify the average total cost curve (ATC), the average variable cost curve (AVC), the average fixed cost curve (AFC), and the marginal cost curve (MC) in the figure. The ATC curve is C3, the AVC curve is C2, the AFC curve is C1, and the MC curve is C4.
27Total cost (TC)The cost of all the inputs a firm uses in production.
28Variable cost (VC)Costs that change as output changes.
29Fixed cost (FC)Costs that remain constant as output changes.
30Marginal cost (MC)The change in a firm's total cost from producing one more unit of a good or service.
31Refer to the diagram. What happens to the average fixed cost of production when the firm increases output from 150 to 200?It falls.
32Refer to the table which shows cost data for Lotus Lanterns, a producer of whimsical night lights. What is the marginal cost per unit of production when the firm produces 100 lanterns?$32
33If the average variable cost curve is above the marginal cost curve, thenmarginal costs can be either increasing or decreasing.
34Which of the following equations is incorrect?ATC = AVC − AFC
35The figure illustrates the long-run average cost curve for a company that makes motors. Suppose the company produces 7 thousand motors per month. Is it experiencing economies of scale, diseconomies of scale, or constant returns to scale? If the company produces 7 thousand motors, then it experiences __. At what level of output does the firm experience the minimum efficient scale?diseconomies of scale.
The minimum efficient scale occurs when the firm produces 5 thousand motors.
36Economies of scaleThe situation when a firm's long-run average costs fall as it increases output.
37Diseconomies of scaleThe situation when a firm's long-run average costs rise as the firm increases output.
38Constant returns to scaleThe situation when a firm's long-run average costs remain unchanged as it increases output.
39Firms experience economies of scale for several reasons. What is one such reason? A firm might experience economies of scale becauseas a firm expands, it may be able to borrow money more inexpensively.
Firms may experience economies of scale for several reasons:
1. A firm's technology may make it possible to increase production with a smaller proportional increase in at least one input.
2. Both workers and managers can become more specialized, enabling them to become more productive, as output expands.
3. Large firms may be able to purchase inputs at lower costs than smaller competitors.
4. As a firm expands, it may be able to borrow money less expensively, thereby lowering its costs.
40Your company incurs a cost for factory rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of factory rentbecomes a variable cost.
There are no fixed costs in the long run. In other words, total cost equals variable cost and average total cost equals average variable cost.
Therefore, the cost of factory rent becomes a variable cost.
41Economies of scale exist as a firm increases its size in the long run because of all of the following exceptas a firm expands its production, its profit margin per unit of output increases.
42All of the following statements are true of the minimum efficient scale except one. Which one?An increase in the output level will reduce profit.
43What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?