Economics Homework Six Answers - Student Three

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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. Examples of variable costs are labor, packaging, and raw materials, because they change in relation to the output unlike fixed costs.


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, for if you continually increase your input eventually your output will decrease.

Correct! Note the proper terminology, however: "decreasing returns to scale," not "diminishing returns."

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.

At a law firm a “short run” cost would be hiring someone overtime to complete a vital document that is needed for the next day’s early, important meeting. An example of a “long run” cost, which is cheaper and more efficient, would be to hire an extra person so that work would get done faster and that the incident of having to pay overtime for someone would not occur.


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.)

The marginal product is 3, the marginal cost is $4, and the marginal revenue is $4.

Right for MP, but need units on the numbers. I.e., MP=3 cars per hour of labor. MC=$12 per hour, or $4 per car as you say. What must MR be? MR=MC, so $4 as you say. Well done. My answers are not so realistic because auto shops charge much more than that for labor!

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?

Obstacles in your life could hold you back if you did not have a college degree. First, you will be more appealing for a higher paying job than a high school graduate and you will also have more experience and knowledge about the world and how it works. Overall, going to college will help make your life a bit easier and more efficient since you will have the knowledge and power when troubles come your way. By earning a college degree, you have an advantage over the person who only went to high school and not to college. You will be able to surmount difficult situations. Spending the money, the “long run” costs, and going to college is cheaper in the long run than not spending the money and not going to college. You will not be able to earn as much as a college graduate, and this lost income will, in the end, be greater than the original price for the college education.


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) increase (B) no effect (C) increase

(A) is "no effect." The MC is a per cab-rider cost. It is unaffected. Other answers are correct. (Minus 1).

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?

Your accounting loss is zero and your economic loss is $8 because instead of wasting an hour watching TV you could have earned $8 by working. For some people an hour of TV is worth $8 dollars, but in the long run, they are losing money and efficiency because they are wasting time watching TV. They could have been doing something that benefits themselves and others instead of sitting in front of the TV mesmerized and doing nothing.



Provide brief answers to any four of the following five questions':

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"].

Average product of labor

Nope. MR must equal MC, and the analogous "value of the marginal product of labor" (the revenue from that marginal increase in labor) must be equal to its marginal cost of that extra labor, which is the wage rate. (Minus 2)

11. Are "long run" average costs lower than "short run" average costs and, if so, why? At present, “short run” average costs are cheaper but if you are planning for the future “long run” average costs are cheaper because overtime fees come with “short run” costs, which cause “short run” costs to be cheaper overall than “long run” costs. For example, let’s say you decided to buy cheap windows that have no insulation. They may be cheaper than the insulated windows, which are more than twice the price, but since they have no insulation, they will not retain the heat in your house in the winter or retain the cool air in the summer. Your bills for heating and air conditioning will increase and over the next five years, the price for the cheaper windows will level out to the price of the more expensive insulated windows. In addition, by spending extra money you will save time and trouble. “Long run” costs are cheaper and more efficient that “short run” costs.

Correct with the conclusion, but the first sentence seemed to incorrectly state the opposite.

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:

(d) use resources such that their marginal products per unit cost are equal

Free pass on question.

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. They feel important that they can help others who are in desperate need. In many businesses, it is common that corruption and fraud are behind many deals. The common reason for businesses to exist is to gain a profit, but charity is in existence solely for others’ well-being. Our conscience is what leads us to do good things and ignore all evil. 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.

Good analysis of charity.

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

Traditional marriage between a man and a woman is the most efficient “division of labor” because together a man and a woman combine into one and each other’s talents make up for the other’s deficiences. Both man and wife divide their work so that each one uses their talents most efficiently. The relationship between a man and his wife cause each other to make sacrifices for the other, which a co-worker may not be willing to do. God created his perfect relationship between a man and a woman so that people may live in harmony and efficiency.

Superb. Plus 3.
107/110, plus 3 for a total of 110/110. Congratulations!!!--Andy Schlafly 19:47, 24 October 2009 (EDT)