# Economics Homework Six Answers - Student Six

AddisonDM 00:05, 24 October 2009 (EDT)

1.Zero. A variable cost is raw materials like oil, the price of which are always fluctuating.

Good, but not quite. "Variable" does not mean a "fluctuating" price. It means variable as a function of output. More output, more variable costs for a firm. (Minus 1).

2.Decreasing.

Correct.

3.Say the firm is a used consignment shop. A short term cost (to improve income) would be to give a better cut to people who’s items are sold, in the hope of bringing so many new items in that income would increase. A long term cost would be to get the store’s employees together on a work-day and discuss a new policy for accepting items that will ultimately be more saleable and profitable. Or to take the example of homeschooling, a short term cost would be to increase study time, while a long term cost, (really more of an investment) would be buying a new, better curriculum.

Good examples. ("whose", not "who's"; "salable" not "saleable")

4.Marginal product is 3. Marginal cost is $4. Since total labor cost is employees x wage per hour, 12 x 4, or$48 per hour, you need to charge at least $48.01 per hour, assuming that all three mechanics are working at the same time. If you make a little money on parts ordered, then you might be able to charge a little less per hour. Need to have units on those numbers. MP-3 cars per hour of labor. MC=$4 per car. Not right on amount to charge, although it seems more realistic. The question said one person can fix 3 cars an hour. Set MR-MC and that's a price of only $4 per car. Perhaps not very realistic, but economically right as a minimum price. (Minus 1) 5.In the short-term, it seems cheaper to skip college and just mess around or work at McDonald’s. However, the money spent on college is a valuable investment; in the long term it makes sense to make that investment, get a good education, and go into a well-paying professional job sector. Ultimately, the cost of college will be more than returned. Right. 7.Assuming that you charge the same rates, your marginal cost remains the same (cost of taxiing one more customer). Average total cost goes up, as the total cost includes fixed costs of which the increased license fee is one. Average variable cost does not contain the fixed price of the license, and so it remains the same as well. Superb. Only student to get this right so far. 8.Accounting profit or loss is simply zero. Nothing was earned or gained monetarily. Economic loss however is$8.00, as you could have made that much money instead of watching TV.

Superb again, maybe the only student (so far) to get this right.

Honors

9.Returns to scale.

Nope. Wage rate. (Minus 2). No student is getting this one right yet.

10.If inflation, which increases the price of everything in the marketplace, is going up, but a good’s price remains constant, this means the actual price of the good minus effect of inflation has gone down. It is simply logic that if the price plus inflation is not changing, then the actual price must be decreasing; otherwise it would go up every year.

Excellent. Simple logic is powerful and you use it well.

12.Assuming only one letter is the answer, B. This is the sort of strategy followed by WalMart; have a huge benefit due to scale, but don’t overexpand.

Nope. D. (Minus 2).

13.It may well be by chance. A charitable institution like Sloan-Kettering still has employees (even if they are not paid they still work), administrative and organizational concerns, and costs to manage/funds to allocate. On the one hand you could say that the desire to make money impairs quality, but on the other hand you could say that without the incentive of money, there is no reason to perform well. So I think it is mostly chance.

You could be right. I like your answer and may use it as a model, even though it was not an expected response.

Extra credit

14. 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.

Superb, also model quality. Plus 4 for being the best answer in the class on this one.
104/110, plus 4 for extra credit. 108/110. Well done!--Andy Schlafly 21:05, 24 October 2009 (EDT)