Economics Homework Six Answers - Student Two

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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. Fixed costs can be easily identified by seeing what the total costs are when output is zero. An example of a variable cost would be the raw materials, packaging, and labor directly involved in a company's manufacturing process.


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. Diminishing marginal returns. This happens when the marginal product of labor (MP) is less than the average product of labor.

Very good! Note, however, that the correct expression is "decreasing returns to scale," a long run concept, not "diminishing marginal returns," which is not a widely used term and which can be confused with "diminishing marginal utility."

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 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.


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.)

Free pass on one question.

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? Because this person took the time to go to college, they prepared themselves for the long run, thus enabling themselves to be able to make more money in the long run. On the other side of the coin, if they had only thought about the short run costs, they would have skipped college and maybe they could have obtained a job that would give them enough money that they needed for that particular situation in life, but the down fall to that is that when any circumstance in their life changes, their temporary job is no longer cutting it.

Superb again.

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? It increases the marginal cost, has no affect on the average variable cost, and increases the total cost.

2 out of 3 ain't bad! (Minus 1). Marginal cost (per cab rider) is not increased by this.

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 profit would be 0 dollars, and the economic profit would be negative 8 dollars.

69/70. Excellent, the best in the class so far.

See Also

Economics Model Answers Six - 2013