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, 03:41, April 4, 2013
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.
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2. Apple Computer probably has ______________ returns of scale for its production of iPhones. Explain briefly.
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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 homeschooling.
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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.)
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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?
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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?
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7. 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?
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===Honors===
Provide brief answers to '''''any four of the following questions''':
8. 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"].
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9. 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.
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10. Are "long run" average costs lower than "short run" average costs and, if so, why?
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11. (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
<br>(b) use materials that have increasing returns to scale
<br>(c) use as much material as possible until there are diminishing returns
<br>(d) use resources such that their marginal products per unit cost are equal
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12. The greater the number of substitutes for a good, is it more or less price elastic? Explain briefly.
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13. The smaller the proportion of income consumed by the purchase of a good, is it more or less income elastic? Explain briefly.
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14. Would government prefer taxing a good that is price elastic or price inelastic? Explain briefly.
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15. Suppose french fries cost $1 and ketchup 10 cents. When the price of ketchup goes up to 20 cents, the quantity demanded for french fries falls by 10%. What is the cross elasticity of demand for french fries with respect to ketchup? Show your work and state whether these goods are complements or substitutes.
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=== Extra Credit for Anyone ===
16. Discuss this statement: the most efficient "division of labor" in the world is ... traditional marriage between a man and woman.
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