Economics Homework Six Answers - Student Eighteen

Michelle F

1\. Fixed costs can be easily identified by seeing what the total costs are when the output is zero. Separately, give an example of a variable cost.

An example of a variable cost is paying an employee.

Correct 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 are 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.

Decreasing.

Correct again!

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 home school.

A short run cost for a company that bottles juice and soft drinks could pay employees overtime to get a contract finished. A long run cost would be hiring and training another employee, which, in the long run, would enable them to handle more contracts.

Superb.

5\. Earlier in this course we learned that someone with a college degree earns, over the course of his life, about $500,000 more than someone who does not. How can you explain this in terms of the advantage of “long run” costs over “short run” costs?

Long run costs are an investment. Short run costs are a quick fix, like the difference between wrapping a gash with a paper towel and going to the ER to get stitches. Stopping your education before college can give you short term benefits, which don’t last long. Continuing through college may leave you with debts from paying tuition, but will give you a degree that in turn can lead to a better job that will pay more. You’ll have to wait longer for your results, but they will be well worth the wait.

Terrific.

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?

Fixed cost-$1 million Average variable cost-$20,000 Average total cost -$40,000 Marginal cost-$18,000

Excellent.

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) the marginal cost, (b) the average variable, or (c) the average total cost? (a) has no effect (b) has no effect (c) increase

Correct again!

8\. Suppose you could earn $8 an hour. Instead, you watch television for an hour. What is you accounting profit or loss, and what is your economic profit or loss, for that hour?

Accounting profit or loss- there is no loss, because accounting only calculates explicit profits or losses. Economic profit or loss- you lose $8 because economic profit/loss takes into account opportunity costs as well as implicit costs.

Superb.

Honors

9\. Suppose there is a sudden increase in the market price for a firm's widget. The firm will hire more employees to produce more output until the point where the value of its marginal product of labor equals its marginal cost of labor. [Hint: the answer is NOT simply "marginal cost"].

Free skip of a question here.

11\. Are “long run” average costs lower than short run costs and, if so, why?

Typically, yes. It is less expensive to train a new employee than it is to pay time and a half to people you are already employing. Long run costs are an investment in the future of your business. They are betting on their company lasting long enough to reap the benefits of the costs. If the company lasts long enough, the costs are lower.

Excellent.

12\. Difficult, but try): Your firm seeks to produce a certain level of output in the most efficient way (the lowest cost). It should use its resources in which of the following ways:

(d) use resources such that their marginal products per unit cost are equal

Superb. One of the very few to answer this correct.

13\. Charity, revisited: Sloan’s charitable effort (Sloan-Kettering) have lasted longer than his business efforts (General Motors). Is this just by chance, or are there reasons why charity lasts longer than business? Feel free to revisit the issue of the interplay between the free market and charity.

I doubt that this happened by coincidence. I think it is partially due to the invisible hand, part free market, and also because of people’s inclination to be charitable. People are less willing to simply give money to a business than they are to give to a charity. When have you heard of a company asking people to give them money for nothing. They don’t. They’ll call it an investment, or a purchase, or something like that. But if it’s for charity, people will give freely.

Good answer.

Perfect score! 110/110! Fantastic.--Andy Schlafly 20:18, 29 October 2009 (EDT)