PROBLEMS AND APPLICATIONS
I. This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost. Fill in the type of cost that best completes each sentence:
a. What you give up for taking some action is called the .
b.Is falling when marginal cost is below it and rising when marginal cost is above it.
2. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant.
a. Define opportunity cost.
b. What is your aunt’s opportunity cost of running a hardware store for a year? If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain
3. Suppose that your college charges you separately for tuition and for room and board.
a. What is a cost of attending college that is not an opportunity cost?
b. What is an explicit opportunity cost of attending college?
4. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:
a. What is the marginal product of each hour spent fishing?
b. Use these data to graph the fisherman’s production function. Explain its shape,
5. Crumble Corporation produces cookies. Here is the relationship between the number of workers and output (in dozens of cookies) in a given day:
a. Fill in the columnar marginal products. What pattern do you see? How might you explain it?
b. A worker costs $30 a day, and the firm has fixed costs of $200. Use this information to fill in the column for total cost.
6. Consider the following cost information for a pizzeria:
a. What is the pizzeria’s fixed cost?
b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also calculate the marginal cost per dozen pizzas using the information on variahle cost. What is the relationship between these sets of numbers? Comment.
7. You are thinking about setting up a lemonade stand. The stand itself costs $200. The ingredients for each cup of lemonade cost $0.50.
a. What is your fixed cost of doing business? What is your variable cost per cup?
b. Construct a table showing your total cost, average total cost, and marginal cost for output levies varying from 0 to 10 gallons. (Hint: There are 16 cups in a gallon.) Draw the three cost curves.
8. Your cousin Minnie owns a painting company with fixed costs of $200 and the following schedule for variable costs.
9. Healthy Harry’s Juice Bar has the following cost schedules.
a. Calculate average variable cost, average total cost, and marginal cost for each quantity.
10. A’firm has fixed cost of $100 and average variable cost of $5 X Q, where Q is the number of units produced.
a. Construct a table showing total cost for Q from 0 to 10.
b. Graph the firm’s curves for marginal cost and average total cost.
11. Consider the following table of long-run total cost for three different firms:
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