Answers to chapter CHECKPOINT EXERCISES
1a.Joe’s explicit costs are $2,000 rent he pays the airport and $200 in interest he pays on his credit card. So Joe’s total explicit costs are $2,200.
1b.Joe’s implicit costs are $10,000 of normal profit for running a shoeshine stand and $500 depreciation for his capital equipment, the chair, polishes, and brushes. So Joe’s total implicit costs are $10,500.
1c.Joe’s economic profit equals his total revenue minus his total opportunity costs. Joe’s total revenue is $15,000. His total opportunity costs are the sum of his explicit costs, $2,200, and his implicit costs, $10,500. Joe’s total opportunity costs are $12,700 so his economic profit is $15,000 minus $12,700, which is $2,300.
2a.Sonya’s explicit costs are $10,000 for cards, $5,000 for rent, and $1,000 for utilities. So Sonya’s explicit costs are $16,000.
2b.Sonya’s implicit costs are $25,000 in forgone income as a real estate agent, $14,000 normal profit, $60 in forgone interest, and $400 in economic depreciation on the cash register, for a total of $39,460.
2c.Sonya’s economic profit equals her total revenue, $58,000, minus her total opportunity costs or $55,640, which is the sum of her explicit and implicit costs. Sonya’s economic profit is $58,000 $55,640, which equals $2,360.
3a.The marginal product and average product schedules are in the table to the right.
3b.Marginal returns increase for the first 2 workers.
3c.Marginal returns decrease after the second worker is hired.
4a.The table to the right has Yolanda’s total product, marginal product, and average product schedules.
4b.Marginal returns increase for the 2nd and 3rd workers.
4c.After the third worker is hired, marginal returns decrease.
5a.The variable costs are the costs of labor; the fixed costs are the costs of the shaping board equipment. Assuming a 5-day work week, the total cost schedules per day are in the table to right.
5b.Total cost minus total variable cost always equals $60. The difference between total cost and total variable cost equals total fixed cost, which does not change with the level of output.
5c.The average cost schedules are in the table to the right.
5d.The marginal cost schedule is in the table to the right.
5e.Len’s average total cost is at a minimum between 44 and 60 body boards a day.
5f.Len’s average variable cost is at a minimum between 44 and 60 body boards a day.
5g.Though the range of output over which the minimum average total cost and average variable cost occur is the same, we know that the average variable cost equals its minimum at a lower level of output than the average total cost. The average total cost equals the average variable cost plus the average fixed cost. The average fixed cost constantly falls as output increases. So as output increases after the average variable cost reaches a minimum and starts to rise, the average total cost continues to fall for a while because the average fixed cost falls and this fall dominates the rise in the average variable cost. Eventually the rise in the average variable cost is greater than the fall in the average fixed cost and at that level of output, the average total cost begins to rise as output increases.
6a.The variable costs are the costs of labor; the fixed costs are the costs of the equipment. The total cost schedules are in the table to right.
6b.Total cost minus total variable cost always equals $1,000. The difference between total cost and total variable cost equals total fixed cost, which does not change with the level of output.
6c.The average cost schedules are in the table to the right.
6d.The marginal cost schedule is in the table to the right.
6e.From the numbers in the average cost table, Yolanda’s average total cost is at a minimum when she produces 5,000 bullfrogs a week.
6f.Yolanda’s average variable cost is at a minimum when she produces 4,000 bullfrogs a week.
6g.Average total cost equals average variable cost plus average fixed cost. Average fixed cost constantly falls as output increases. So as output increases after average variable cost reaches a minimum and starts to rise, average total cost continues to fall for a while because average fixed cost falls and this fall dominates the rise in average variable cost. Eventually, the rise in average variable cost is greater than the fall in average fixed cost and at that level of output, average total cost begins to rise as output increases.
7.The completed table is to the right.
8.A = $1,050. Calculate A using TVC = TCTFC. Total cost is given in the row. For total fixed cost, TFC, note that TFC = TC TVC. Use the information in the top row to get TFC = $500. So A = $1,550 $500, which equals $1,050.
B = $1,200. Calculate B by adding TVC + TFC, with TFC from part (a) as $500. Then B = $700 + $500, which equals $1,200.
C = $5. Calculate C by calculating TFC TP, which is $500 100 = $5.
D = $8.50. Calculate D by calculating TC TP, which is $850 100= $8.50.
E = $2.50. Calculate E as the change in TC divided by the change in TP, which is ($1,550 $1,200) (380 240) = $2.50.
9.The long-run average cost curve, LRAC, shows the lowest average total cost of producing any level of output when the firm has had sufficient time to change both its plant size and labor employed. To construct the LRAC curve, calculate the ATC curve for each plant size. The ATC that is the lowest for each level of output is the LRAC for that level of output.
10.A firm that is producing at the lowest average cost might be able to lower its average cost further by increasing its production. Figure 12.1 shows an example. If the firm is producing at point A, the firm can increase its production by hiring more labor and increasing the size of its plant and move to point B. At point B the average cost is lower than at point A. Between point A and point B, the firm enjoys economies of scale.