Economics Homework Six Answers - Student Ten

1\. Fixed costs can be easily identified by seeing what the total costs are when output is zero. Separately, give an example of a variable cost. A variable cost would be the extra employees hired at Christmas by a department store.

Superb in both answers.

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 diminishing 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.

Excellent, but usually the word is "decreasing" rather than "diminishing". Don't confuse the concept of "returns to scale" with "diminishing marginal utility," which is a completely different concept.

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. A long run cost would be adding an addition to my light bulb factory. A short run cost would be hiring temporary employees for the holiday season.

Superb.

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 MP=3, the MC=$12 the minimum charge per car would be $4.

The MC is wrong, but the rest is correct except full units are needed. MC=$4 per car. (Minus 1).

6\. Suppose you spent one million dollars to build your factory, and another million dollars for materials and labor and electricity to make 50 cars. What is your fixed cost, average variable cost, and average total cost? Now suppose it costs you $18,000 to make a 51st car. What is your marginal cost? FC-$1,000,000 VC-$1,000,000 AVC-$20,000/per unit ATC-$40,000/per unit MC-$18,000

Superb!

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? If you consider the license fee as part of the fixed cost then: a. no effect b. no effect c. yes, increase. If you consider it a variable cost then: a. no effect b. yes, increase c. yes, increase.

First answer is terrific. It's not a variable cost.

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? The accounting loss is zero. The economic loss is $8. The economic profit is unknown because you don’t know what show he watched and how it affected his business.

Television-watching virtually never helps anything. Your first two sentences are correct. An economic loss of $8 means there is no economic profit.

69/70. One of the best homeworks in the class. Congratulations!!--Andy Schlafly 22:48, 24 October 2009 (EDT)

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