Eco assigment 2

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Assignment 8:

Production Costs – Part 1

(10 Points)

Terms and Definitions: Define the following terms

Fixed Costs: __________________________________________________________________

______________________________________________________________________________

Marginal Product:: _____________________________________________________________

______________________________________________________________________________

Production: ___________________________________________________________________

______________________________________________________________________________

Total Costs: ___________________________________________________________________

______________________________________________________________________________

Total Product: _________________________________________________________________

______________________________________________________________________________

Total Revenue: ________________________________________________________________

______________________________________________________________________________

Variable Costs: ________________________________________________________________

______________________________________________________________________________

_____________________________________________________________________________

Short Answer Problems:

1. Explain why the principle of diminishing marginal productivity only occurs in the short-run

______________________________________________________________________________

2. Explain the relationship between the economic concept of diminishing marginal

productivity and the principle of increasing marginal costs?

______________________________________________________________________________

3. Explain the difference between a short-run production decision and a long-run production

decision.

______________________________________________________________________________

Problems and Exercises:

1. Complete the production table below and answer the following questions

a. At which level of employment does diminishing marginal productivity begin?

b. At which level of employment does diminishing absolute productivity begin?

2. Suppose you are opening up a pizza restaurant. You decide to open up your restaurant at

the Irvine Spectrum. Before you begin to sell pizza’s, you must first set up your restaurant. To

do this you need to purchase the following:

Rent: $1,000 per month

Insurance: $300 per month

Cash Registers (2): $750 each

Pizza Oven: $1500

Furniture/Interior Design: $3000

Neon Sign/Billboard: $1000

Number

Workers

Output

(# of Pizzas)

Marginal

Product

Average

Product

Fixed

Cost

Variable

Cost

Total

Cost AFC AVC ATC

0 0

1 600

2 1400

3 2400

4 3000

5 3300

6 3400

7 3400

8 3100

9 2700

Monthly Cost and Production Summary Table

For simplicity purposes, your only variable input is labor, which you will hire for $1,500 per

month. (in actuality, any cost that increases as your production increases will be considered

variable costs. Other variable costs may include ingredients, electric and gas bills.

a. Use the information above to complete the table below for your restaurant

b. . At what level of output does diminishing marginal productivity begin? ____________

c. At what point to marginal costs begin to increase? ______________________________

d. Suppose you can sell pizzas for $15 each. How much profit would make if you sell 3300

pizzas? ___________________

Output

Fixed

Cost

Variable

Cost

Total

Cost

Marginal

Cost

Average

Fixed

Cost

Average

Variable

Cost

Average

Total

Cost

0 - 100 - - - -

1 100

2 80

3 75

4 340

5 5

6 260

7 387

8 43

9 400

10 60

3. Complete the table below and answer the corresponding questions.

a. Is this a short-run or a long-run cost table? How do you know? _________________

________________________________________________________________________