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Chapter 6- Cost and Industry Structure
Q-1
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After working as a head chef for years, Jared gave up his $60,000 salary to open his own restaurant last year. He withdrew $50,000 of his own savings that had been earning 4% interest and borrowed another $100,000 from the bank at a rate of 5%. As the restaurant space he was leasing had no separate office, Jared converted his basement apartment into office space. He had previously rented the apartment to a student for $300/month. The following table summarizes his operations for the past year.
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Total sales revenue
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$590,000
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Employee wages
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$120,000
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Materials
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$350,000
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Interest on loan
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$5,000
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Utilities
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$10,000
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Rent
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$25,000
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Total explicit costs
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$510,000
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Q. is Jared's accounting profit?
Answer
Q. Suppose Jared could have used his talents to run a similar kind of business instead. If he values his entrepreneurial skill at $10,000 annually, find Jared's total implicit costs.
Answer
Q. What was Jared's economic profit last year?
Answer
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Q-2
Problem:
The following table summarizes the short-run relationship between a firm's total labor input and its total output.
Fill in the following table:
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Labor Input
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Total Product
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Marginal Product
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Average Product
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0
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0
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1
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20
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2
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46
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3
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75
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4
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102
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5
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125
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6
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138
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7
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140
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8
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136
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a. Fill in the columns labeled "Marginal Product" and "Average Product."
b. Over what range of labor input does the firm experience increasing marginal returns? Diminishing marginal returns? Negative marginal returns?
Answer-
c. Comparing marginal product to average product, under what circumstances will average product rise? Under what circumstances will average product fall?
Answer
Q-3 - Per-unit cost
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Problem:
Suppose a firm is currently producing 10 units. Its fixed costs are $100 and its variable costs are $40. At an output level of 10 units, what is the firm's current:
a. Total cost?
b. Average fixed cost?
c. Average variable cost?
d. Average total cost?
e. If the total cost of producing 11 units is $147, what is the marginal cost of the eleventh unit?
f. Is average total cost rising or falling? How do you know?
g. Is average variable cost rising or falling? How do you know?
Q.- 4 Problem
Fill in the bellow table:
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Quantity,
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Total cost,
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Fixed cost,
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Variable cost,
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Total revenue,
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Profit
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0
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$62
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10
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$90
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20
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$110
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30
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$126
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40
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$144
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50
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$166
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60
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$192
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70
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$224
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80
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$264
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90
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$324
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100
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$404
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Selling price is $4.00
Problem:5
A competitive firm's short-run cost information is shown in the table below.
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Output
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Fixed Cost
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Variable Cost
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Total Cost
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0
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$9.00
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$ 0.00
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$ 9.00
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1
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9.00
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8.00
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17.00
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2
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9.00
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15.00
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24.00
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3
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9.00
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21.00
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30.00
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4
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9.00
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26.00
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35.00
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5
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9.00
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32.00
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41.00
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6
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9.00
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39.00
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48.00
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7
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9.00
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47.00
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56.00
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8
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9.00
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56.00
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65.00
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9
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9.00
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66.00
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75.00
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10
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9.00
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77.00
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86.00
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Q. Suppose the firm can sell all the output it desires at the market price of $9.10. Compute the firm's total revenue and its total profit (loss) for the potential output choices shown in the table. What output level maximizes the firm's profits (or minimizes its losses)?
Answer-
Profit maximization: MR = MC approach
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Problem:6
Suppose a competitive firm's cost information is as shown in the table below. Its total fixed cost is $9.00.
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Output
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Marginal Cost
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Average Variable Cost
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Average Total Cost
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0
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1
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$ 8.00
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$8.00
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$17.00
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2
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7.00
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7.50
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12.00
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3
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6.00
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7.00
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10.00
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4
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5.00
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6.50
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8.75
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5
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6.00
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6.40
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8.20
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6
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7.00
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6.50
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8.00
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7
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8.00
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6.71
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8.00
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8
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9.00
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7.00
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8.13
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9
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10.00
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7.33
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8.33
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10
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11.00
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7.70
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8.60
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Q. Suppose the firm sells its output at a price of $9.10. What is the firm's marginal revenue (MR)?
Answer-
Q. Compare MR to marginal cost (MC) to determine the firm's profit maximizing (loss-minimizing) output level. Be sure to check whether or not the firm should shut down.
Answer
Q. What is the firm's per-unit profit (loss) at this output level?
Answer
Q. What is the firm's total profit (loss) at this output level?
Answer
Q. Repeat parts a. through d. assuming the price has fallen to $7.10.
Answer
Q.
Repeat again assuming the price has fallen to $6.10
Answer
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