Chapter 8: Costs and the Changes at Firms Over Time Solutions to End-of-Chapter Problems

Transcription

1 Chapter 8: Costs and the Changes at Firms Over Time Solutions to End-of-Chapter Problems 1. short run/long run These represent concepts that economists use to describe time. The short run is a period of time over which a firm cannot change all of its inputs. All inputs can be changed over the long run. fixed costs/variable costs These are costs of production. Fixed costs do not vary in the short run. Variable costs change with changes in production. marginal cost/average cost These represent per unit costs of production. Marginal cost is the change in variable cost (or total costs) when production changes. Average variable cost is variable cost divided by the quantity produced. average total cost/long-run average total cost Average total costs are short-run total cost divided by output. Long-run average total costs trace out the lowest points on the short-run average total cost curves. average product of labor/marginal product of labor Marginal product of labor is the change in production that can be obtained with the addition of labor. Average product of labor is total product (the quantity produced) divided by the amount of labor input employed. breakeven point/shutdown point The breakeven point occurs when profits are maximized (P=MC) and all costs are covered (P=ATC). The shutdown point occurs when it pays to produce nothing in the short run. At this point P=AVC. economies of scale/diseconomies of scale These are two terms describing what happens to a firm s average total cost when its scale is changed. Under economies of scale, average total costs fall when scale increases. Under diseconomies of scale, average total costs rise with scale. price-directed/quantity-directed These concepts are two possible approaches a merged firm could follow to determine its level of production. Under a quantity-directed approach, managers simply determine what level is to be produced. Under a price-directed approach, managers use a transfer price to determine the level of output to produce. Copyright Houghton Mifflin Company. All rights reserved. 1

2 Chapter 8 2. Figure 8-1 shows the various cost curves for a competitive firm. Figure 8-1 a. Marginal cost is greater than ATC at the profit-making quantity. b. Fixed costs are unchanged as the market price decreases. Variable costs increase as the market price increases. 3. Figure 8-2 shows the per unit diagram for a firm that is at breakeven. MC ATC AVC P = ATC = P 1 * Figure Copyright Houghton Mifflin Company. All rights reserved.

3 Costs and the Changes at Firms Over Time A profit-maximizing firm will produce * determined by the intersection of P 1 and MC. At this quantity P 1 =ATC. Therefore (P 1 x*)=(p 1 xatc) or TR=TC and economic profits are zero. The firm is earning only normal profits and is at breakeven. 4. a. Figure 8-3 is a graph of average and marginal ages. b. As marginal is below the average and falling, the new average will fall. c. The average will rise to.. Average Marginal uantity of People Figure TC FC VC ATC AVC MC a. MC=P at 4 units. Yes, it will earn economic profits of. b. The breakeven price is The shutdown price is Figure 8-4 is a sketch of suggested information. The firm experiences diseconomies of scale. Copyright Houghton Mifflin Company. All rights reserved. 3

4 Chapter 8 MC 1 MC 2 ATC 2 ATC * Figure Figure 8-5 is a plot of the data given in the table in the text. The minimum efficient scale is 3 units Economies of Scale Diseconomies of Scale Constant Returns Figure Copyright Houghton Mifflin Company. All rights reserved.

5 Costs and the Changes at Firms Over Time 8. a. Figure 8-6 is a plot of the information in the question. b. The long-run average total cost curve is shown ATC 1 ATC 2 ATC 3 Long-Run Average Total Costs Figure 8-6 Copyright Houghton Mifflin Company. All rights reserved. 5