AK Microeconomics – Chapter 6

CHAPTER SIX

Answers to Self-Test Questions

1. Tuition and textbook cost is: $2800 x 2 = $5 600

Additional transportation cost is: $700 x 2 = 1 400

Lost income is: $1000 x 24 = 24 000

31 000

(The cost of board and lodging is not included because Judy is already

currently paying for this.)

2. Total revenue: $105 000

Total explicit cost $65 000

Implicit cost:

wages ($1500 X 12) 18 000

interest (8% X 200 000) 16 000

Total Cost 99 000

Total economic profit 6 000

3. a) See the following table:

Units of Labour / TP / MPL / APL
0 / 0 / / / /
1 / 80 / 80 / 80
2 / 170 / 90 / 85
3 / 250 / 80 / 83.33
4 / 310 / 60 / 77.5
5 / 350 / 40 / 70
6 / 370 / 20 / 61.67
7 / 370 / 0 / 52.86

b) 3rd

c) 2

d) 0


4. See the following table:

Quantity of Labour / Total Output / MPL / APL
1 / 400 / 400 / 400
2 / 1000 / 600 / 500
3 / 1500 / 500 / 500
4 / 1800 / 300 / 450
5 / 1900 / 100 / 380

5. a) See the following table:

Units of Labour / Total output / TVC / MC / AVC
0 / 0 / 0 / - / -
1 / 100 / 200 / $2.00 / $2.00
2 / 220 / 400 / 1.67 / 1.82
3 / 320 / 600 / 2.00 / 1.88
4 / 400 / 800 / 2.50 / 2.00
5 / 460 / 1000 / 3.33 / 2.17
6 / 480 / 1200 / 10.00 / 2.50

b) When two units of labour are employed (output equals 220).

c) 80 (400 minus 320)

6. See the following table

Output
(per day / TC / TVC / AVC / TFC / AFC / ATC / MC
0 / $200 / / / / / $200 / / / / / /
1 / 280 / $80 / $80.00 / 200 / $200 / $280 / $80
2 / 340 / 140 / 70.00 / 200 / 100 / 170 / 60
3 / 420 / 220 / 73.33 / 200 / 66.67 / 140 / 80
4 / 520 / 320 / 80.00 / 200 / 50.00 / 130 / 100
5 / 640 / 440 / 88.00 / 200 / 40.00 / 128 / 120
6 / 780 / 580 / 96.67 / 200 / 33.34 / 130 / 140


7. a) and b) See the following table

Inputs / Total Output / TC1 / MC1 / ATC1 / TC2 / MC2 / ATC2
0 / 0 / $150 / / / / / $150 / / / /
1 / 10 / 175 / $2.50 / $17.50 / 170 / $2.00 / $17.00
2 / 25 / 200 / 1.67 / 8.00 / 190 / 1.33 / 7.60
3 / 35 / 225 / 2.50 / 6.43 / 210 / 2.00 / 6.00
4 / 40 / 250 / 5.00 / 6.25 / 230 / 4.00 / 5.75
5 / 42 / 275 / 12.50 / 6.55 / 250 / 10.00 / 5.95

8. a) 100 c) 200

b) 150 d) (the value of) average fixed cost

Answers to Study Guide Questions

1. True.

2. True

3. False: explicit costs are actually paid out in dollars, implicit costs are not.

4. True.

5. True.

6. False: only one fixed input is needed in the definition of the short-run.

7. False: the result of adding one more unit of input.

8. True.

9. True.

10. False: at least one input is fixed.

11. a 16. c 21. c 26. a 31. b

12. b 17. c 22. d 27. b 32. d

13. a 18. d 23. b 28. b 33. b

14. b 19. c 24. d 29. a 34. d

15. c 20. e 25. d 30. a 35. b


36A. Key Problem

a) See Table 6.7

Table 6.7 (completed)

Number of Workers in Crew / TPL
(feet per day) / MP
(feet per day) / AP
(feet per day)
1 / 20 / 20 / 20
2 / 80 / 60 / 40
3 / 150 / 70 / 50
4 / 200 / 50 / 50
5 / 230 / 30 / 46
6 / 246 / 16 / 41

b) See Figure 6.8

Figure 6.8 (completed)

c) See Table 6.8

Table 6.8 (completed)

Number of Workers in Crew / TP
(feet per day) / TVC / AVC /
MC
1 / 20 / $240 / $12.00 / $12.00
2 / 80 / 480 / 6.00 / 4.00
3 / 150 / 720 / 4.80 / 3.43
4 / 200 / 960 / 4.80 / 4.80
5 / 230 / 1200 / 5.22 / 8.00
6 / 246 / 1440 / 5.85 / 15.00


d) See Figure 6.9

Figure 6.9 (completed)

e) 4 workers.

f) 200.

g) Minimum average variable cost is achieved when output is 200.

h) 3 workers.

i) 150.

j) Minimum marginal cost occurs when output is 150.

k) The conclusion is that maximum average product occurs using the same number of workers that are used to produce an output that minimizes average variable costs. Similarly, maximum marginal product occurs using the same number of workers that are used to produce an output that minimizes marginal costs.

37A. See the following table:

Table 6.9 (Completed)

Units of Labour TP AP MP
0 0 / /
1 12 12 12
2 30 15 18
3 54 18 24
4 68 17 14
5 80 16 12
6 84 14 4
7 77 11 – 7

38A. See the following table:

Table 6.10 (Completed)

Output / TFC / TVC / TC / AFC / AVC / ATC / MC
1 / $1200 / $400 / $1600 / $1200 / $400 / $1600 / $400
2 / 1200 / 600 / 1800 / 600 / 300 / 900 / 200
3 / 1200 / 720 / 1920 / 400 / 240 / 640 / 120
4 / 1200 / 800 / 2000 / 300 / 200 / 500 / 80
5 / 1200 / 1500 / 2700 / 240 / 300 / 540 / 700
6 / 1200 / 3000 / 4200 / 200 / 500 / 700 / 1500
7 / 1200 / 5250 / 6450 / 171.43 / 750 / 921.43 / 2250
8 / 1200 / 8000 / 9200 / 150 / 1000 / 1150 / 2750

39A. a) fixed

b) fixed

c) variable

d) variable

e) fixed

40A. a) and b)

Accountant Economist

Total revenue $6750 Total revenue $6750

Explicit costs – 3500 Explicit cost 3500 Implicit labour cost 3200

Implicit interest cost 250 Total – 6950

Profit 3250 – 200

41A. a) See Table 6.11

Table 6.11 (completed)

Number of Workers / Total
Product / Average
Product / Marginal
Product
1 / 2 / 2 / 2
2 / 5 / 2.5 / 3
3 / 9 / 3 / 4
4 / 12 / 3 / 3
5 / 14 / 2.8 / 2
6 / 15 / 2.5 / 1
7 / 15 / 2.1 / 0

b) 4 workers (where marginal product first falls)

c) 7 workers

d) 12 units (Most productive is where AP is at a maximum and this occurs when it equals MP)

42A. a) See the following table:

Table 6.12 (completed)

Output / TFC / TVC / TC / MC / AFC / AVC / ATC
1 / $210 / $100 / $310 / $100 / $210 / $100 / $310
2 / 210 / 160 / 370 / 60 / 105 / 80 / 185
3 / 210 / 210 / 420 / 50 / 70 / 70 / 140
4 / 210 / 290 / 500 / 80 / 52.50 / 72.50 / 125
5 / 210 / 390 / 600 / 100 / 42 / 78 / 120
6 / 210 / 516 / 726 / 126 / 35 / 86 / 121
7 / 210 / 672 / 882 / 156 / 30 / 96 / 126
8 / 210 / 862 / 1072 / 190 / 26.25 / 107.75 / 134
9 / 210 / 1104 / 1314 / 242 / 23.33 / 122.67 / 146
10 / 210 / 1400 / 1610 / 296 / 21 / 140 / 161
11 / 210 / 1781 / 1991 / 381 / 19.09 / 161.90 / 181
12 / 210 / 2310 / 2520 / 529 / 17.50 / 192.5 / 210

b)  3 units. (Average product is at a maximum where average variable cost is at a minimum)

c)  $140

d) 5 units (Economic capacity is at the output level where ATC is at a minimum.)

e) $100 (A change in fixed costs has no effect on marginal costs.)

43A. Explicit costs (also known as accounting costs) are costs that are actually paid out in money. They constitute payments to non-owners of a firm. Implicit costs are those costs that do not require actual expenditures of money because they are incurred by the owners of a firm.


44A. TP stands for total product and is the total output of any productive process. AP means average product is the average amount of output per unit of input. MP is marginal product and is the increase in total product as a result of adding one more unit of input.

45A. See the following table:

Table 6.13 (completed)

Output / AFC / AVC / ATC / MC / TVC / TC
1 / $160 / $40 / $200 / $40 / $40 / $200
2 / 80 / 35 / 115 / 30 / 70 / 230
3 / 53.33 / 36.67 / 90 / 40 / 110 / 270
4 / 40 / 40 / 80 / 50 / 160 / 320
5 / 32 / 46 / 78 / 70 / 230 / 390
6 / 26.67 / 55 / 81.67 / 100 / 330 / 490
7 / 22.86 / 68.57 / 91.43 / 150 / 480 / 640
8 / 20 / 85 / 105 / 200 / 680 / 840

46A. a) $2000 (It’s the amount of total cost when production (quantity) is zero.

b)  $100 (The amount by which total costs increase, from $2700 to $2800)

c) $860 (Total cost of 4 tonnes is $2860, total fixed costs are $2000; total variable costs are the difference.)

d) $1350 ($2700/2)

47A. a) See the following table:

Table 6.15 (completed)

Output / TVC2 / AVC2 / MC2
1 / $22 / $22 / $22
2 / 32 / 16 / 10
3 / 39 / 13 / 7
4 / 44 / 11 / 5
5 / 50 / 10 / 6
6 / 60 / 10 / 10
7 / 75 / 10.71 / 15
8 / 100 / 12.50 / 25


b) See the following figure:

Figure 6.10 (completed)

48A. a) From the graph, find the MP at each output. The total product is just the addition of the MP at each level of output. Once you’ve found the TP, the average is found by dividing by output for each level of output. See the following table:

Output / Marginal Product / Total Product / Average Product
1 / 4 / 4 / 4
2 / 8 / 12 / 6
3 / 12 / 24 / 8
4 / 14 / 38 / 9.5
5 / 15 / 53 / 10.6
6 / 16 / 69 / 11.5
7 / 17 / 86 / 12.3
8 / 17 / 103 / 12.9
9 / 16 / 119 / 13.2
10 / 14 / 133 / 13.3
11 / 10 / 143 / 13
12 / 6 / 149 / 12.4
13 / 2 / 151 / 11.6


b) See the following figure:

Figure 6.11 (completed)

c) 13.3

49A. They are upside-down images of one another: where AP is at a maximum, AVC is at a minimum; where MP is at a maximum, MC is at a minimum.

50A Excess capacity is the situation in which a firm’s output is below its economic capacity.

51A. a) See the following figure:

Figure 6.12 (completed)

If AVC is $30 and AFC is $20, then ATC is the total of $50. If AFC is $20 when output is 10, then TFC must be $200. The rest of the data can be calculated as follows:

Output / AVC / AFC / ATC
0
10 / 30 / 20 / 50
20 / 25 / 10 / 35
30 / 20 / 6.66 / 26.66
40 / 15 / 5 / 20
50 / 10 / 4 / 14
60 / 15 / 3.33 / 18.33
70 / 20 / 2.86 / 22.86
80 / 25 / 2.5 / 27.5

b) 50 units. (This is the output at which ATC is at a minimum.)

c) 50 units (This is the output at which AVC is at a minimum.)

52A. See the following table:

Table 6.16 (completed)

Output / TC 1 / MC l / TC II / MC II
0 / $1200 / / / $2000 / /
1 / 1400 / $200 / 2060 / $60
2 / 1600 / 200 / 2120 / 60
3 / 1800 / 200 / 2180 / 60
4 / 2000 / 200 / 2240 / 60
5 / 2200 / 200 / 2300 / 60
6 / 2400 / 200 / 2360 / 60
7 / 2600 / 200 / 2420 / 60
8 / 2800 / 200 / 2480 / 60
9 / 3000 / 200 / 2540 / 60
10 / 3200 / 200 / 2600 / 60

a) one and five (Total costs are lower between these outputs.)

b) above five (Total costs are lower between these outputs.)


53A. a) See the following table:

Table 6.17 (Completed)

Output of
Chairs / Total
Hours / Average Hours
Per Chair / Marginal Hours per Chair / TVC / AVC / TFC / TC / ATC / MC
1 / 5 / 5 / 5 / $60 / $60 / $180 / $240 / $240 / $60
2 / 9 / 4.5 / 4 / 108 / 54 / 180 / 288 / 144 / 48
3 / 12 / 4 / 3 / 144 / 48 / 180 / 324 / 108 / 36
4 / 18 / 4.5 / 6 / 216 / 54 / 180 / 396 / 99 / 72
5 / 25 / 5 / 7 / 300 / 60 / 180 / 480 / 96 / 84
6 / 36 / 6 / 11 / 432 / 72 / 180 / 612 / 102 / 132

b) 3 chairs (This is where AVC is minimum.)

c) AVC: $48; ATC: $108.

d) 5 chairs (This is where ATC is minimum.)

54A. Yes, this is rational since the peasants are trying to maximize total product (not total profit as in the case of North American farmers) and the opportunity cost of the extra time needed to do this is close to zero.

55A. The cost of giving away the “free” tickets is the loss of revenue they might have obtained from selling the tickets to other supporters (net this against the revenue they might gain from the resulting good publicity). It does make a difference for what game the tickets are offered since if the game was against unattractive opposition the tickets may have gone unsold and so the cost would have been zero.

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