Week 3 Answers for Lecture and Tutorial Questions
Lecture Questions
Q1
Indicate whether each of the following is an explicit or an implicit cost.
a Payments to Officeworks for stationary
Interest foregone on funds an owner uses in their uses in
b their own company
A salary foregone by the owner of the firm by operating his
c or her own company
d Income foregone while caring for young children
Workers compensation policy payments a company makes
e for its employees
f A manager’s salary
Ans Q1
Q1. Indicate whether each of the following is an explicit or an implicit cost.
Explicit cost
a Payments to Officeworks for stationary (payment for materials)
Interest foregone on funds an owner uses in their uses in Implicit cost
b their own company (opportunity cost)
A salary foregone by the owner of the firm by operating Implicit cost
c his or her own company (opportunity cost)
Implicit cost
d Income foregone while caring for young children (opportunity cost)
Workers compensation policy payments a company Explicit cost
e makes for its employees (payment related to wages)
Explicit cost
f A manager’s salary (payment of wages).
Q2
Last year, Jarod left a job that pays $60 000 to run his own bike-repair shop. Jarod’s shop charges $65
for a repair and last year the shop performed 3000 repairs. Jarod’s production costs for the year included
rent, wages and equipment. Jarod spent $50 000 on rent and $100 000 on wages for his employees.
Jarod keeps whatever profit the shop earns, but does not pay himself an official wage. Jarod borrowed
$20 000 for the shop’s equipment at an annual interest rate of 5 per cent.
a) What is Jarod’s accounting profit?
b) What is Jarod’s economic profit?
Ans Q2
a. Accounting profit = Total revenue – Explicit costs.
Accounting profit = [$65 x 3,000] – [$50 000 + $100 000 + Interest on borrowed capital].
Accounting profit = [$65 x 3,000] – [$50 000 + $100 000 + $1000].
Accounting profit = $195 000 – $151 000.
Accounting profit = $44 000.
b. Economic profit = Total revenue – [Explicit costs + Implicit costs].
Economic profit = [$65 x 3000] – [$50 000 + $100 000 + Interest on borrowed capital + Forgone
wages].
Economic profit = [$65 x 3000] – [$50 000 + $100 000 + $1000 + $60 000].
Economic profit = $195 000 – $211 000.
Economic profit (loss) = − $16 000.
Q3
Fill in the table. At what point does marginal product start to diminish?
Labour (employees) Total Production(pizzas) Marginal product of labour
(pizzas)
0 0 0
1 20
2 45
3 75
4 100
5 120
6 135
7 145
8 150
Ans Q3
Labour (employees) Total Production(pizzas) Marginal product of labour (pizzas)
0 0 0
1 20 20 – 0 = 20
2 45 25
3 75 30
4 100 25
5 120 20
6 135 15
7 145 10
8 150 5
Marginal product starts to diminish from labour 4 onwards
Q4
Suppose that Bill owns a vehicle smash repair shop. The table below shows how the quantity of cars
Bill can repair per month depends on the number of workers that he hires. Assume that he pays each
worker $4000 per month and his fixed costs are $6000 per month. Using the information provided,
complete the table.
QUANTITY OF
QUANTITY OF CARS PER AVERAGE
WORKERS MONTH FIXED COST VARIABLE COST TOTAL COST TOTAL COST
0 0
1 20
2 30
3 40
4 50
5 55
Ans Q4
QUANTITY OF
QUANTITY OF CARS PER VARIABLE
WORKERS MONTH FIXED COST COST TOTAL COST AVERAGE TOTAL COST
$ $ $ $
0 0 $6,000 0 $6,000 —
1 20 6,000 $4,000 10,000 $500
2 30 6,000 8,000 14,000 467
3 40 6,000 12,000 18,000 450
4 50 6,000 16,000 22,000 440
5 55 6,000 20,000 26,000 473
Q5
Use the information in the following graph to find the values for the following at an output level of
1000:
a) Marginal cost
b) Total cost
c) Variable cost
d) Fixed cost
Ans Q5
a) MC = $15
b) Total cost = ATC x Q = $30 x 1000 = $30 000.
c) Variable cost = AVC x Q = $20 x 1000 = $20 000.
d) Fixed cost = total cost – variable cost = $30 000 – $20 000 = $10 000.
Q6
Fill in the blank spaces of this table.
Ans Q6
Q7
What is the difference between total cost and variable cost in the long run?
Ans Q7
In the short run, Total cost = Variable cost + Fixed cost; but in the long run, Total cost = Variable cost
because there are no fixed costs in the long run.
Q8
What are economies of scale? What are four reasons firms may experience economies of scale?
Ans Q8
Economies of scale exist when a firm’s long-run average costs fall as the firm increases output. Firms
may experience economies of scale because: (1) a firm’s technology may allow it to increase
production with a smaller proportional increase in at least one input, (2) both workers and managers
can become more specialised as output expands, (3) large firms may be able to purchase inputs at
lower costs than smaller firms can, and (4) as a firm expands, it may be able to borrow money at a
lower interest rate, thereby lowering its costs.
Q9
What are diseconomies of scale? What is the main reason that firms may eventually encounter
diseconomies of scale as they keep increasing the size of their store or factory?
Ans Q9
Diseconomies of scale exist when a firm’s long-run average costs rise as the firm increases output.
Diseconomies of scale eventually arise because managing a store or factory above a certain size is
simply too complicated.
Tutorial Questions
T1
Calculate average and marginal product.
Quantity of fertilizers Additional units of labour Yield of Corn
(kg/acre) (bushel/acre)
0 40 50
40 40 75
80 40 105
120 40 115
160 40 123
200 40 125
240 40 124
Ans T1
Quantity of Change in Yield of Corn Change in Marginal Average
fertilizers fertilizers (bushel/acre) yield Product Product
(lb/acre) = TP/ L
0 40 50 --- ---
40 40 75 25 0.625 1.875
80 40 105 30 0.75 1.313
120 40 115 10 0.25 0.958
160 40 123 8 0.2 0.769
200 40 125 0 0 0.615
240 40 124 -2 -0.05 0.504
T2
Suppose the total cost of producing 10 000 tennis balls is $30 000 and the fixed cost is $10 000.
a) What is the variable cost?
b) When output is 10 000, what are the average variable cost and the average fixed cost?
c) Assuming that the cost curves have the usual shape, is the dollar difference between the
average total cost and the average variable cost greater when the output is 10 000 tennis balls
or when the output is 30 000 tennis balls? Explain.
Ans T2
(a) Variable cost = total cost – fixed cost.
Variable cost = $30,000 − $10,000 = $20,000.
(b) AVC = VC/Q = $20,000/10,000 = $2;
AFC = FC/Q = $10,000/10,000 = $1.
(c) The gap must get smaller as output rises because
ATC = AVC + AFC and AFC falls as output rises.
T3
Calculate MC.
Total product Total cost Marginal Cost
(Q) (TC) (MC)
0 $50
1 70
2 88
4 118
7 166
8 185
Ans T3
Total product Total cost Marginal Cost
(Q) (TC) (MC)
0 $50
1 70 (70-50)/(1-0) = 20
2 88 (88-70)/(2-1) = 18
4 118 (118-88)/(4-2) = 15
7 166 (166-118)/(7-4) = 16
8 185 (185-166)/(8-7) = 19
T4
Using the following table, construct the cost schedule for a firm operating in the short run.
Q TC TVC ATC AVC MC
0 60
1 80 20 80 20
2 90 30 15 10
3 102 42 34 12
4 120 30 15
5 145 85 29 25
6 180 120 20 35
7 228 168 32.6 24
8 300 37.5 72
Ans T4
Q TFC TC TVC ATC AVC MC
=(TFC+TVC) =(TC-TFC) =(TC/Q) =(TVC/Q) =∆TC/∆Q
0 60 60 0 60
1 60 80 20 80 20 20
2 60 90 30 45 15 10
3 60 102 42 34 14 12
4 60 120 60 30 15 18
5 60 145 85 29 17 25
6 60 180 120 30 20 35
7 60 228 168 32.6 24 48
8 60 300 240 37.5 30 72
MCQ
1) Which of the following is a characteristic of the long run?
A) There are fixed inputs.
B) All inputs can be varied.
C) Plant capacity cannot be increased or decreased.
D) There are both fixed and variable inputs.
B
2) If a producer is not able to expand its plant capacity immediately, it is _______.
A) bankrupt
B) operating in the long run
C) operating in the short run
D) losing money
C
3) Which of the following is an implicit cost of production?
A) Interest paid on a loan to a bank
B) Wages paid to labour plus the cost of carrying benefits for workers
C) The utility bill paid to water, electricity, and natural gas companies
D) Rent that could have been earned on a building owned and used by the firm
D
4) How do economic costs of production differ from accounting costs?
A) Economic costs include expenditures for hired resources while accounting costs do not.
B) Economic costs add the opportunity costs of a firm using its own resources while accounting costs
do not.
C) Accounting costs include expenditures for hired resources while economic costs do not.
D) Accounting costs are always larger than economic costs.
B
5) What does the production function show?
A) The total cost of producing a given quantity of output.
B) The maximum output that can be produced from each possible quantity of inputs.
C) The technology used to produce output.
D) The incremental output gained by improving the production process.
B
6) If four workers can product 18 chairs a day and five can produce 20 chairs a day, what is the
marginal product of the fifth worker?
A) 2 chairs
B) 3 chairs
C) 4 chairs
D) 38 chairs
A
7) The law of diminishing marginal returns _________.
A) explains why the average total cost and marginal cost curves are U-shaped in the short run
B) explains why the average total cost, average fixed cost, and the marginal cost curves are U-shaped
in the short run
C) causes average total costs to rise at a decreasing rate as output increases
D) causes the difference between average total cost and average variable cost to get smaller as output
increases
A
8) In the short run, marginal product of labour increases at first and then falls because _________.
A) as more labour is hired, they are not as skilled as the first ones hired
B) there are fewer opportunities for division of labour and specialisation when fewer workers are
hired
C) managerial inefficiency sets in when a firm gets too large
D) the new workers do not have as much experience as those who have been with the firm for a long
time and therefore are not as productive
B
9. The long run:
A. depends on the type of firm and type of production being considered.
B. is defined as however long it would take a firm to vary all of its costs.
C. is longer in industries that take longer to make adjustments in input levels.
D. All of these answers are correct.
D
10. Diseconomies of scale refers to returns that occur in the long run when:
A. an increase in the quantity of output decreases average total cost.
B. an increase in the quantity of output increases average total cost.
C. average total cost does not depend on the quantity of output.
D. None of these is correct.
B
11. Returns that occur in the long run when an increase in the quantity of output decreases average
total cost are called:
A. economies of scale.
B. diseconomies of scale.
C. constant returns to scale.
D. minimum average total cost.
A
12. A long-run ATC curve shows:
A. the minimum average total cost possible for every possible size firm across an industry.
B. which size firm can capture the lowest costs per unit for an industry.
C. what size firms can capture economies of scale by expanding.
D. All of these are correct.
D
13. When a firm can achieve economies of scale by expanding, its long-run ATC curve:
A. slopes down.
B. slopes upward.
C. is flat.
D. Any of these is possible.
A
