Question 1

A firm is producing 10,000 units of output at a total cost of $5,000. If the firm increases output by 5,000 units and its total costs rise by $2,000, the firm has:

Accepted Answer

Economies of scale occur when increasing production leads to a lower average cost per unit, which is the case here as the cost increase is proportionally less than the output increase.

Question 2

A firm's long-run total cost curve is given by LTC = 2,000Q - 10Q² + 1/3Q³, and long-run marginal cost is given by LMC = 2,000 - 20Q + Q². What is the quantity of output that minimizes long-run average total cost?

Accepted Answer

The answer of A firm's long-run total cost curve is...

Question 3

Use the following to answer question:
Figure 7.14 
-(Figure 7.14) Refer to the graph. Do you agree or disagree with the following statement? Why? "If the firm can sell its product for $30 and it's selling 12 units, it should close its doors and produce nothing, since it is losing money."

Accepted Answer

The answer of Use the following to answer question:
Figure 7.14...

Question 4

Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves:

Accepted Answer

The cost of producing both goods together is $50,000, which is $25,000 less than the cost of producing them separately. This indicates that the firm is benefiting from producing the goods jointly, thereby achieving economies of scope.

Question 5

Suppose the total cost of producing goods Q₁ and Q₂ jointly is given by TC = 100 + 50Q₁Q₂ - (Q₁Q₂)^0.5. The total cost of producing Q₁ and Q₂ in two separate facilities is given by TC = 75 + 3,000Q₁ + 1,000Q₂ + + . If the firm produces Q₁ = 40 and Q₂ = 100, the firm should produce the goods _____ because of _____ of scope.

Accepted Answer

When producing the goods jointly, the total cost is TC = 100 + 50(40)(100) - (40)(100)(0.5) = 4,900. 
When producing the goods in separate facilities, the total cost is TC = 75 + 3,000(40) + 1,000(100) + 11(40)(100) + 11(40)(100) = 7,575. 
Therefore, producing the goods jointly results in a lower total cost, indicating economies of scope.

Question 6

Use the following to answer question:
Figure 7.13 
-(Figure 7.13) _____ of scale occur between _____ units of output.

Accepted Answer

Figure 7.13 shows an upward-sloping long-run average cost curve with a point of minimum cost at output level 5. As output level increases beyond 5, the curve begins to slope upward, indicating that firms are experiencing diseconomies of scale. This trend continues until output level 9, where the curve reaches its maximum point, signaling the existence of high levels of inefficiency and large proportions of idle capacity. Therefore, diseconomies of scale occur between 5 and 9 units of output making choice C the correct answer.

Question 7

A firm with a production function Q = KL (where K is units of capital and L is units of labor) has an expansion path that is given by K = 2L. The wage rate (W) is $20 and the rental on capital is $10. Complete the following table, assuming that the firm is using the optimal mix of inputs for any given output level.

Accepted Answer

The answer of A firm with a production function Q...

Question 8

Answer the following questions.

Accepted Answer

The answer of Answer the following questions. ...

Question 9

Fran is considering permanently closing down her beauty salon. A consultant advises her that if she stays open for business, she will have operating revenues of $300,000 and operating costs of $280,000. In addition, Fran has paid $40,000 for fixtures that can be resold for $15,000 after she closes the beauty salon.

Accepted Answer

The answer of Fran is considering permanently closing down her...

Question 10

The firm's long-run total cost is given by LTC = 100Q - 10Q²+ (1/3)Q³, and long-run marginal cost is given by LMC = 100 - 20Q + Q². At what output level does the firm have economies of scale?

Accepted Answer

Economies of scale occur when an increase in output leads to a decrease in long-run average costs, which happens when the long-run marginal cost (LMC) is less than the long-run average cost (LAC). Given the LMC formula, economies of scale are present when the derivative of LTC (which gives us LMC) is decreasing. The condition for economies of scale is when LMC is decreasing with an increase in Q, which, based on the given LMC formula, happens when Q is less than a certain threshold. Without the exact LAC calculation, we infer economies of scale from the point where LMC starts to increase, which is not directly given but can be inferred to be at the lowest Q value provided among the options, as LMC is increasing with Q in the formula.

Question 11

Use the following to answer question:
Figure 7.15 
-(Figure 7.15) Complete the following table:

Accepted Answer

The answer of Use the following to answer question:
Figure 7.15...

Question 12

A firm produces two goods Q₁ and Q₂. For economies of scope to occur, it must be TRUE that:

Accepted Answer

The condition for economies of scope requires that the total cost of producing both goods together is less than the sum of the costs of producing each good separately. Therefore, option A, which states that TC(Q₁,0) + TC(0,Q₂) > TC(Q₁,Q₂), is the only choice that correctly expresses this condition.

Question 13

Use the following to answer question:
Figure 7.16 
-(Figure 7.16) Graph the firm's total cost curve as it corresponds to points A, B, and C.

Accepted Answer

The answer of Use the following to answer question:
Figure 7.16...

Question 14

Stan started a lawn-fertilizing business and is considering purchasing a powered fertilizer spreader or a self-propelled spreader. The powered spreader has a fixed cost of $4,000 for the season, whereas the self-propelled spreader has a fixed cost of only $100 for the season. The variable costs of fertilizing a lawn with the powered spreader and self-propelled spreader are $7 and $15, respectively.

Accepted Answer

The answer of Stan started a lawn-fertilizing business and is...

Question 15

Suppose a firm with a production function Q = KL (where MP_L = K and MP_K = L) is producing 125 units of output by using 5 workers and 25 units of capital. The wage rate (W) per worker is $10 and the rental per unit of capital (R) is $2. If it decreases output to 45 units, long-run average total cost _____ at 125 units of output to _____ at 45 units of output.

Accepted Answer

To find the long-run average total cost (LRATC), we need to divide the total cost by the level of output. The total cost can be calculated as the sum of the cost of labor and the cost of capital:
Cost of labor = Wage rate * Number of workers = $10 * 5 = $50
Cost of capital = Rental rate * Capital units = $2 * 25 = $50

Total cost = Cost of labor + Cost of capital = $50 + $50 = $100

LRATC at 125 units of output:
LRATC = Total cost / Output = $100 / 125 = $0.80

LRATC at 45 units of output:
We are not given the new combination of capital and labor, so we need to find it using the production function. Let the new level of labor be L1 and capital be K1 such that Q1 = 45.
45 = K1 L1
We know that K = 25 (given) and L = 5 (given)
125 = K L
K = 125/L = 125/5 = 25
Similarly, K1 = 45/L1
Now we can use the cost formula again to calculate the new LRATC:
Cost of labor = Wage rate * Number of workers = $10 * L1
Cost of capital = Rental rate * Capital units = $2 * K1
 
Total cost = Cost of labor + Cost of capital = $10L1 + $2K1

LRATC at 45 units of output:
LRATC = Total cost / Output = ($10L1 + $2K1) / 45

To find the new LRATC, we need to express L1 in terms of K1 using the production function:
45 = K1 L1
L1 = 45/K1
Substituting in the LRATC formula:
LRATC = ($10L1 + $2K1) / 45 = ($10 * 45/K1 + $2K1) / 45

LRATC simplifies to:
LRATC = $10/K1 + $2/45

To find the LRATC at the new level of output, we need to find the value of K1 that minimizes this expression. Taking the derivative and setting it to zero, we get:
- $10/K1^2 + $2/45 = 0
Solving for K1, we get:
K1 = sqrt(225) = 15

Now we can substitute K1 = 15 in the LRATC formula:
LRATC = $10/15 + $2/45 = $0.80 + $0.044 = $0.844

Therefore, the long-run average total cost rises from $0.80 at 125 units of output to $0.844 at 45 units of output. The correct choice is B.

Question 16

The firm's long-run total cost is given by LTC = 5,000Q - 100Q² + Q³, and its long-run marginal cost is given by LMC = 5,000 - 200Q + 3Q². At what output level is the firm subject to diseconomies of scale?

Accepted Answer

The answer of The firm's long-run total cost is given...

Question 17

Suppose that a windshield business changes from paying its workers an hourly wage rate to a piece rate system (i.e., paying workers for each windshield installed). The new compensation scheme increases workers' productivity by 44%, with only a negligible effect on their earnings. Graphically illustrate how the change in compensation affects the total cost of windshield installation.

Accepted Answer

The answer of Suppose that a windshield business changes from...

Question 18

Menard quit his high-school teaching job, which paid $60,000 per year, to start a business that prepares students for the SAT exam. His first year in business generated the following revenues and costs:

Accepted Answer

The answer of Menard quit his high-school teaching job, which...

Question 19

Jim owns Nickelback Bar, dedicated to the rock band Nickelback. Jim pays his landlord, a strip mall, a $3,000 monthly rent. If Jim breaks the lease before the end of the calendar year, he is required to pay $2,000 for each of the remaining months. Jim just purchased $40,000 of Nickelback-themed bar fixtures; the fixtures have absolutely no value in any alternative use. Each weekend Jim contracts with a security company that provides four security guards for a total of $1,200.

Accepted Answer

The answer of Jim owns Nickelback Bar, dedicated to the...

Question 20

Gillian quit her sales job, which paid $60,000 per year, and became a middle-school science teacher earning $48,000 per year. What is Gillian's opportunity cost of switching careers?

Accepted Answer

The answer of Gillian quit her sales job, which paid...

Quiz 7: Costs

A firm is producing 10,000 units of output at a total cost of $5,000. If the firm increases output by 5,000 units and its total costs rise by $2,000, the firm has:

A firm's long-run total cost curve is given by LTC = 2,000Q - 10Q² + 1/3Q³, and long-run marginal cost is given by LMC = 2,000 - 20Q + Q². What is the quantity of output that minimizes long-run average total cost?

Use the following to answer question: Figure 7.14 -(Figure 7.14) Refer to the graph. Do you agree or disagree with the following statement? Why? "If the firm can sell its product for $30 and it's selling 12 units, it should close its doors and produce nothing, since it is losing money."

Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves:

Use the following to answer question: Figure 7.13 -(Figure 7.13) _ of scale occur between _ units of output.

Answer the following questions.

The firm's long-run total cost is given by LTC = 100Q - 10Q²+ (1/3) Q³, and long-run marginal cost is given by LMC = 100 - 20Q + Q². At what output level does the firm have economies of scale?

Use the following to answer question: Figure 7.15 -(Figure 7.15) Complete the following table:

A firm produces two goods Q₁ and Q₂. For economies of scope to occur, it must be TRUE that:

Use the following to answer question: Figure 7.16 -(Figure 7.16) Graph the firm's total cost curve as it corresponds to points A, B, and C.

The firm's long-run total cost is given by LTC = 5,000Q - 100Q² + Q³, and its long-run marginal cost is given by LMC = 5,000 - 200Q + 3Q². At what output level is the firm subject to diseconomies of scale?

Menard quit his high-school teaching job, which paid $60,000 per year, to start a business that prepares students for the SAT exam. His first year in business generated the following revenues and costs:

Gillian quit her sales job, which paid $60,000 per year, and became a middle-school science teacher earning $48,000 per year. What is Gillian's opportunity cost of switching careers?

Quiz 7: Costs

A firm is producing 10,000 units of output at a total cost of $5,000. If the firm increases output by 5,000 units and its total costs rise by $2,000, the firm has:

A firm's long-run total cost curve is given by LTC = 2,000Q - 10Q2 + 1/3Q3, and long-run marginal cost is given by LMC = 2,000 - 20Q + Q2. What is the quantity of output that minimizes long-run average total cost?

Use the following to answer question: Figure 7.14 -(Figure 7.14) Refer to the graph. Do you agree or disagree with the following statement? Why? "If the firm can sell its product for $30 and it's selling 12 units, it should close its doors and produce nothing, since it is losing money."

Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves:

Use the following to answer question: Figure 7.13 -(Figure 7.13) _____ of scale occur between _____ units of output.

Answer the following questions.

The firm's long-run total cost is given by LTC = 100Q - 10Q2 + (1/3) Q3, and long-run marginal cost is given by LMC = 100 - 20Q + Q2. At what output level does the firm have economies of scale?

Use the following to answer question: Figure 7.15 -(Figure 7.15) Complete the following table:

A firm produces two goods Q1 and Q2. For economies of scope to occur, it must be TRUE that:

Use the following to answer question: Figure 7.16 -(Figure 7.16) Graph the firm's total cost curve as it corresponds to points A, B, and C.

The firm's long-run total cost is given by LTC = 5,000Q - 100Q2 + Q3, and its long-run marginal cost is given by LMC = 5,000 - 200Q + 3Q2. At what output level is the firm subject to diseconomies of scale?

Menard quit his high-school teaching job, which paid $60,000 per year, to start a business that prepares students for the SAT exam. His first year in business generated the following revenues and costs:

Gillian quit her sales job, which paid $60,000 per year, and became a middle-school science teacher earning $48,000 per year. What is Gillian's opportunity cost of switching careers?

A firm's long-run total cost curve is given by LTC = 2,000Q - 10Q² + 1/3Q³, and long-run marginal cost is given by LMC = 2,000 - 20Q + Q². What is the quantity of output that minimizes long-run average total cost?

Use the following to answer question: Figure 7.13 -(Figure 7.13) _ of scale occur between _ units of output.

The firm's long-run total cost is given by LTC = 100Q - 10Q²+ (1/3) Q³, and long-run marginal cost is given by LMC = 100 - 20Q + Q². At what output level does the firm have economies of scale?

A firm produces two goods Q₁ and Q₂. For economies of scope to occur, it must be TRUE that:

The firm's long-run total cost is given by LTC = 5,000Q - 100Q² + Q³, and its long-run marginal cost is given by LMC = 5,000 - 200Q + 3Q². At what output level is the firm subject to diseconomies of scale?