Exam4_Econ101_ss2007_Lulu

Name______ID______

  1. The following table gives the short-run and long-run total costs for various level of output of some company:

Quantity / TC1 / TC2 / LRATC / SRTFC / SRTVC / AFC / AVC / MC
0 / 0 / 450
1 / 400 / 500 / 400 / 450 / 50 / 450 / 50 / 50
2 / 500 / 535 / 250 / 450 / 85 / 225 / 42.5 / 35
3 / 565 / 565 / 188.3 / 450 / 115 / 150 / 38.3 / 30
4 / 595 / 605 / 148.75 / 450 / 155 / 112.5 / 38.75 / 40
5 / 660 / 660 / 132 / 450 / 210 / 90 / 42 / 55
  1. Which column, TC1 or TC2, gives long-run total cost, and which gives short-run total cost? How do you know? (2 points)

TC1: long-run total cost; TC2:short-run total cost

In the long-run, when output level is zero, the total cost is zero as there is no fixed input/cost.

In the short-run, the total cost is positive even when the output level is zero.

LRTC is always less than or equal to SRTC, no matter how much the quantity is.

  1. For each level of output, find short-run TFC (SRTFC), TVC, AFC, AVC and MC. (10 points)
  1. At what output level would the firm’s short-run and long-run input mixes the same? (2 points)

When the output level is 3 and 5, the short-run and long-run input mixes are the same.

  1. For each level of output, find long-run average total cost (LRATC). (2 points)

e. Please explain the concepts of ‘economies of scale’ and ‘diseconomies of scale’. Over what range of output, do you see economies of scale? Diseconomies of scale? Constant return to scale?

(4 points)

Economies of scale: long-run cost rises proportionately less than output

Or when output level increases, the LRATC decreases.

Or LRATC curve slopes downward.

Diseconomies of scale: long-run cost rises proportionately larger than output.

Or When the output level increases, LRATC increases.

Or LRATC curve slopes upward.

(Any one of these explanation can get full points. You can also draw a graph.)

I see economies of scale over all the output range in this case. Diseconomies of scale and constant return to scale don’t exist here.

2.

Figure 7-1
Total Sales Revenue / $120,000
Cost of Row Materials / $30,000
Wages and Salaries / $20,000
Utilities / $5,000
Rent / $25,000

Henry decides to quit his job (earning $50,000 per year), take his $60,000 in savings, and open a dry cleaning store. Figure 7-1 shows the revenues and expenditures for his first year of operation. Assume Henry could have earned $3,000 in interest on the money used to open the store.

a. What is the explicit cost for Henry’s business? What is the accounting profit for his business? (4 points)

Explicit cost (Accounting cost)=$30,000+$20,000+$5,000+$25,000=$80,000

Accounting profit=Total Revenue-Explicit cost=$120,000-$80,000=$40,000

b. What is the implicit cost for Henry’s business? What is the economic profit for his business? (6 points)

Implicit cost=foregone salary + foregone interest rate= $50,000+$3,000=$53,000

All cost of production (opportunity cost)

= Explicit cost +Implicit cost=$80,000+$53,000=$133,000

Economic profit=Total Revenue-All costs of production=$120,000-$133,000=-$13,000

3.

Units of / Total / Total / Profit / Marginal / Marginal
Price / Output / Cost / Revenue / Revenue / Cost
> $800 / 0 / $200 / 0
$800 / 1 / $500 / $800 / $300 / $800 / $300
$750 / 2 / $700 / $1,500 / $800 / $700 / $200
$700 / 3 / $800 / $2,100 / $1,300 / $600 / $100
$650 / 4 / $850 / $2,600 / $1,750 / $500 / $50
$600 / 5 / $950 / $3,000 / $2,050 / $400 / $100
$550 / 6 / $1,150 / $3,300 / $2,150 / $300 / $200
$500 / 7 / $1,450 / $3,500 / $2,050 / $200 / $300
$450 / 8 / $1,850 / $3,600 / $1,750 / $100 / $400
$400 / 9 / $2,350 / $3,600 / $1,250 / $0 / $500
$350 / 10 / $2,950 / $3,500 / $550 / -$100 / $600

The above figure indicates data for the total cost curve and the demand curve facing Jonathan's Riding Mower Shop. The quantities indicated are potential daily sales.

a. For each level of output, find the total revenue and profit. What is the profit-maximizing sales level for Jonathan? (10 points)

The profit-maximizing sales level for Jonathan is6.

b. Please find the marginal revenue and marginal cost for producing and selling each additional unit. Using MR and MC approach, what is the optimal sales/output level? (10 points)

The optimal sales/ output level should be 6. When the output level is 5, MR>MC, the firm should increase the output level; when the output level is 7, MR<MC, the firm should decrease its output level. Therefore, 6 is optimal output level.

3. At its optimal output level, a firm has total revenue of $7,500 per day and total costs of $15,000 per day. What should the firm do in the short run if

a. the firm has total fixed costs of $7,000 per day? Explain why. (5 points)

TVC=TC-TFC=15,000-7,000=8,000

The firm should shut down,because the total revenue can not cover the total variable cost.

b. the firm has total variable costs of $6,000 per day? Explain why. (5 points)

The firm should keep operating, because the total revenue is larger than the total variable cost.

4. Bonus Question

a. Explain the concept of plant. The firm’s cost curves are depicted in Figure 6-11.Please compare the plant size at point F, H, G. (2 points)

A plant is a collection of fixed inputs.

F has the same size with H

H has a larger size than F and H

b. Now this firm decides to expand its output level from 200 to 375 units. Which point will likely illustrate its cost situation in the short run? How can the firm get there? (2 points)

H

The firm increases variable inputs without increasing the fixed capital.

  1. Now this firm decides to expand its output level from 200 to 375 units. Which point will likely illustrate its cost situation in the long run? How can the firm get there? (2 points)

G The firm can get there through Increasing the plant size (or fixed inputs).