Economics Homework Six - Model

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1. Fixed costs can be easily identified by seeing what the total costs are when output is _______. Separately, give an example of a variable cost.

Zero. An example of a variable cost is an electric bill. Depending upon the business, the bill could be more or less during the month due to the increase or decrease of goods being made. (Allie)
Fixed costs can be easily identified by seeing what the total costs are when the output is zero. Variable cost are identified as the costs that help increase your output. (Leonard)
... An example of a variable cost is taxes. (Timothy)

2. The Lecture mentioned how a prior student in this course is paying her way through college by working as a waitress in a fancy Manhattan restaurant. Suppose her boss told her one day, "We were profitable last month. To increase our profits next month, I'm going to double our number of waitresses so that we can serve more people!" But our former economics student told him that his plan would fail because there is _____________ returns of scale in the restaurant, because more waitresses would result in more wasted time talking to each other and waitresses getting in the way of each other.

Decreasing (Isaac)
The plan would fail because there is a decreasing returns of scale in the restaurant, because more waitresses would result in more wasted time talking to each other and waitresses getting in the way of each other. (Shanna)
Note that many students said "diminishing" here, but that implies a greater decline than "decreasing" and also confuses this concept with the very different concept of "diminishing marginal utility." Note that "decreasing returns to scale" is a long run concept, and has nothing to do with "marginal" or short run concepts. (Instructor)

3. Give an example of a "short run" cost for a firm, and give an example of a "long run" cost. This can refer to any type of firm, from a grocery store to a baseball team to a homeschool.

An example of a short run cost is fixing a leak in the roof; an example of a long run cost is replacing the roof. (Nat)
Short run would be renting a car; long run would be buying a car. (Dan)
An example of a short run cost for a clothing store would be the boss putting someone working behind the customer-service counter into the store pricing articles of clothing, because they had a lack of people pricing clothing. An example of a long run cost would be the boss hiring another person to be pricing clothing, thus fixing the problem permanently, rather then just temporary as in the first example. (Deborah)
An example of a short run cost would be to hire an employee for a short amount of time, or hiring an employee to work overtime. An example of a long term cost would be buying better equipment or expanding the store. (Anna)

4. Suppose you own a mechanics' shop that fixes cars, and you have 4 employees whom you pay $12 per hour. On average your 4th employee can fix 3 cars an hour. What is your marginal product (MP) and marginal cost (MC), and what is the minimum on average that you need to charge customers (your marginal revenue) for fixing cars? (Assume your only cost is labor, and the customer pays the cost of any parts.)

Your marginal product (MP) from the 4th employee is 3, because he can fix 3 cars in an hour. Marginal cost (MC) - wage/MP, so the MC would be 12/3 = 4. Therefore, the minimum on average that you need to charge your customers is $4 per car, so that you will be earning back as much as it cost you to make the car. (Mary)
3 cars per hour, $4, $4. (Jonathan S.)

5. Earlier in this course we learned that someone who obtains a college degree earns, over the course of his life, about $500,000 more than someone who does not. How can you explain this fact in terms of the advantages of "long run" costs over "short run" costs?

Obtaining a college degree would be expensive and time-consuming in the short run, however in the long run it would pay off since you would be more likely to get a better job and make more money than someone who does not have a degree. (Trisha)

6. Suppose you spent one million dollars to build your factory, and another million dollars for materials and labor and electricity to make 50 cars. What is your fixed cost, average variable cost, and average total cost? Now suppose it costs you $18,000 to make a 51st car. What is your marginal cost?

The fixed cost would be $1,000,000, the average variable cost would be $20,000, and the average total cost would be $40,000, [and with] the 51st car my marginal cost would be $18,000. (Matt)
FC-$1,000,000 VC-$1,000,000 AVC-$20,000/per unit ATC-$40,000/per unit MC-$18,000 (Aran)

7. Suppose you own and drive a taxicab, and its annual license fee is $1000 per year. Suppose you learn that the license fee will increase to $1200 next year. Does this increase either increase, decrease, or have no effect on (a) marginal cost, (b) average variable cost, and (c) average total cost?

a)- no effect; b)- no effect; c)- Increase (Mark)

8. Suppose you could earn $8 an hour. Instead, you watch television for an hour. What is your accounting profit or loss, and what is your economic profit or loss, for that hour?

The accounting loss would be $0. The economic loss is $8.00. Instead of wasting an hour watching TV, you could be doing something much more efficient. (Amanda)
In accounting I would have lost nothing because I did not spend anything, but in economic profit I would have lost $8 because I wasted my time. (Alexander)


9. Suppose there is a sudden increase in the market price for a firm's widget. The firm will hire more employees to produce more output until the point where the value of its marginal product of labor equals its _____________. [Hint: the answer is NOT simply "marginal cost"].

Marginal cost of labor. (Duncan)
The wage rate, which is the marginal cost of labor. Match the marginal product of labor to the marginal cost of that same input, which is labor. (Instructor)

10. Explain the following from the lecture: if inflation is 10% per year for three years, but one particular good keeps the same price during those three years, then its opportunity cost and real price actually decreased.

Opportunity cost is relative to alternatives which in this case is higher causing the opportunity cost to decrease. The real price is adjusted for inflation. (Sarah)

11. Are "long run" average costs lower than "short run" average costs and, if so, why?

The long run average costs would be less because you may have to pay more than the short run at first, but eventually the long run would pay for itself and then some. Because long run is more efficient. (Seth)
The long run is cheaper than the short run because in the short run, the only thing that you can do to increase your output is to either increase your input or the number of employees that you have, whereas in the long, you can control many other costs, such as the efficiency of the factory, thereby affecting fixed costs .... (Dermot)

12. (Difficult, but try): Your firm seeks to produce a certain level of output in the most efficient way (the lowest cost). It should use its resources in which of the following ways:

(a) use materials that generate the highest marginal product
(b) use materials that have increasing returns to scale
(c) use as much material as possible until there are diminishing returns
(d) use resources such that their marginal products per unit cost are equal

D (Kate)
D is the correct choice because if the marginal product per unit cost for any input were lower than the others, then there would be an inefficiency because that input would not be producing as much as the others. The amount of that input should be adjusted to increase its marginal product per unit cost up to the level of the others, for greater overall profit. (Instructor)

13. Charity, revisited: Sloan's charitable efforts (Sloan-Kettering) have lasted longer than his business efforts (General Motors). Is this just by chance, or are there reasons why charity lasts longer than business? Feel free to revisit the issue of the interplay between the free market and charity.

Charity lasts longer than businesses because they have the support of God and people because everyone feels good when they donate money for a cause. ... God made us as perfect beings but we were led away by temptation. We lost the gifts that God had given us and charity is a way for us to give back to God and repent for the things we have done. In all of us, there is a desire to do something good. (Veronika)

Extra Credit for Anyone

14. The most efficient "division of labor" in the world is ... traditional marriage between a man and woman.

I think this is possible, but not necessarily true. Marriage alone does not actually guarantee anything. Marriage would probably lead to a greatly efficient division of labor when the spouses fill the traditional roles: husband primarily making money, and wife helping to educate the kids and take care of the house. However if there is animosity between the spouses over these roles (this might have the same effect as transaction costs!) the efficiency will be impaired. But if the spouses are agreed to these roles (absence of transaction costs) then the division of labor will be extremely efficient. (Addison)