Microeconomics

ECON 2103: Problem Set 8 Prof. Jog

Due: Thursday, March 30th, 2017 in Class Max. Points: 20

1. Suppose that a small hair styling salon had revenues of $150,000 in a given year. The owner

spent $10,000 on utilities, $60,000 on supplies (shampoo, conditioner, hair coloring and

other chemicals, etc.), and $50,000 on equipment (mirrors, chairs, scissors, curling irons,

etc.), including maintenance. The owner could have earned $50,000 working at another

salon. (5 Points)

a. Calculate the accounting and economic profit for the hair styling salon. Show your

work.

b. Based on your answers in part (a), should the owner close this salon or continue

with it?

2. "If not for the law of diminishing returns, all the food that the world needs could be grown

in a flowerpot.” Do you agree, disagree, or agree in part? To help with your answer, think

of land as the only fixed factor and fertilizer as the only variable factor. How much food

could you grow in the flowerpot if the marginal product of fertilizer were constant

regardless of the amount used per unit of land? (3 Points)

3. Data from Betty’s Bakery: Fill in the blanks using the relationships between various

costs. (7 Points)

Quantity of

cakes

Fixed Cost

Variable Cost

Total Cost

Average Fixed Cost

Average Variable

Cost

Average Total Cost

Marginal Cost

1 $13 $38 2 $28 3 $70 4 $64 5 $110 6 $108 7 $133 8 $185

Based on your numbers, draw diagrams showing the following:

a. FC and AFC against the output

b. AVC and ATC against the output

c. MC against the output.

ECON 2103: Problem Set 8 Prof. Jog

4. Consider the following table of long-run total costs for four different firms: (5 Points)

Output 1 2 3 4 5 6 7

Firm 1 $180 $350 $510 $660 $800 $930 $1,050

Firm 2 $120 $250 $390 $540 $700 $870 $1,050

Firm 3 $150 $300 $450 $600 $750 $900 $1,050

Firm 4 $210 $340 $490 $660 $850 $1,060 $1,290

a. Which firm shows constant returns to scale over the entire range of output? Show

your work.

b. Which firm has diseconomies of scale over the entire range of output? Show your

work.

c. Which firm has economies of scale over the entire range of output? Show your

work.

d. Which firm’s long-run marginal cost decreases as output increases? Show your

work.

e. Firm 4’s efficient scale occurs at what amount of output? Show your work.