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1. Which of the following is an implicit cost?

a. the owner of a firm forgoing an opportunity to earn a large salary working

for a Wall Street brokerage firm
b. interest paid on the firm's debt
c. rent paid by the firm to lease office space

2. Joe wants to start his own business. The business he wants to start will require
that he purchase a factory that costs $400,000. Joe currently has $500,000 in the
bank earning 3 percent interest per year. If Joe purchases the factory with his own
money, what is the annual implicit opportunity cost of purchasing the factory?

3. Suppose Joe purchases the factory using $200,000 of his own money and
$200,000 borrowed from a bank at an interest rate of 6 percent. What is Joe’s
annual opportunity cost of purchasing the factory?

4. Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons.
Due to the popularity of his local country western band, Farmer Tony has more
students requesting lessons than he has time for if he is to also maintain his
farming business. Farmer Tony charges $25 an hour for his guitar lessons. One
spring day, he spends 10 hours in his fields planting $130 worth of seeds on his
farm. He expects that the seeds he planted will yield $300 worth of wheat. What is
the total opportunity cost of the day that Farmer Tony incurred for his spring day
in the field planting wheat?

5. Tony's accountant would most likely figure the total cost of his wheat planting to

6. Tony's accounting profit equals

7. Tony's economic profit equals

8. You subcontract with a chocolate manufacturer to box premium chocolates for

their mail order catalogue business. You rent a small room for $150 a week in the
downtown business district that serves as your factory. You can hire workers for $
275 a week. The following table contains partial information about your current
Number of Chocolate boxes Marginal Cost of Cost of Total cost
Workers produced per Product of Factory workers
week Labor (wages)
0 0
1 330 150 275 425
2 630
3 150 825 975
4 890
5 950 60 1375
6 10 1800

9. What is the marginal product of the second worker?

10. What is the total cost associated with making 890 boxes of premium chocolates
per week?

11. During the thanksgiving break you don’t box any chocolates. What are your costs
during that week?

12. One week, you earn a profit of $125. If your revenue for the week is $1100, how
many boxes of chocolate did you produce?

13. You have received an order for 3000 boxes of chocolates for next week. If you
expect that the trend in the marginal product of labor will continue in the same
direction, what do you do? Why?

14. Suppose labor is the only variable cost in the production process and all workers
are paid the same wage. Assume that the total cost of production is $100 when 2
workers are hired and $120 when 3 workers are hired. What is the firm’s fixed
0 30
1 10
2 55
3 20
4 17.5
5 100
6 27.5
7 40

15. What is the efficient scale of production of Queen’s Pizzeria?

16. What is the marginal cost of producing the 5th unit?

17. What is the average fixed cost when 3 units are produced?

18. What is the total cost when 7 units are produced?

19. When 5 units are produced is the average total cost curve increasing, decreasing,
or constant?

20. A perfectly competitive firm is producing 40 units of output, has an average total
cost of equal to $5, and is earning $240 economic profit in the short-run. What is
the current market price?

21. An industry currently has 100 identical firms, all of which have fixed costs of $16
and average variable costs as follows:
Quantity Average Variable cost
1 $1
2 2
3 3
4 4
5 5
6 6
22. Compute marginal cost and average total cost

1 $1
2 2
3 3
4 4
5 5
6 6

23. The price is currently $9. What is the total quantity supplied in the market.

24. Find each firm’s individual profit in ways:

25. As this market makes the transition to its long run equilibrium will the price rise
or fall? Will the quantity demanded rise of fall? Will quantity supplied by each
firm rise or fall?
26. Suppose the efficient scale of production in this industry is 4 units and the long
run equilibrium market quantity is 800 units, provide a graph of the long run
equilibrium for both the market and the firm.

27. Illustrate the profit made by each of the initial 100 firms.

28. How many firms have entered the market as a result of the existence of these

29. What is the long-run equilibrium profit?

30. Given your answer to f) why do firms continue to operate in the long run?

31. In the short run, a market consists of 100 identical firms. The market price is $8
and the total cost to each firm of producing various levels of output is given in the
table below.

Q 0 1 2 3 4 5
TC 1 7 14 22 31 41
32. What will total quantity supplied be in the market?

33. A profit-maximizing firm in a competitive market is currently producing 100 units

of output. It has average revenue of $10, and its average total cost is $8. Does the
average total cost curve intersect the marginal cost curve at an output level of less
or more than 100 units?

34. A profit-maximizing firm in a competitive market is able to sell its product for $9.
At its current level of output the firm’s average total cost is $11. The firm’s
marginal cost curve crosses the marginal revenue curve at an output level of 10
units. Assuming the firm does produce its profit-maximizing level of output,
calculate and illustrate its profit.

35. The following table summarizes the cost information for a perfectly competitive firm.
Output Total Cost ATC TVC AVC MC
0 $5 - 0 - -
1 $10 10 5 5 5
2 $12 6 7 3.5 2
3 $15 5 10 3.3 3
4 $19 4.75 14 3.5 4
5 $30 6 25 5 11
36. Suppose price that this firm can charge equals to $11. What should this firm do in
the short run and in the long run? Use two methods for proving your answer.

37. Suppose price falls to $4. Now what are the firm’s decisions in the short run and
in the long run? Use two methods for proving your answer.

38. What if price was $3?

39.A publisher faces the following demand schedule for the next
novel of its popular author

Price Qty
$100 0 novels
90 1
80 2
70 3
60 4
50 5
40 6
30 7
20 8
10 9
0 10

40. The author is paid $100 to write the book, and the marginal cost of publishing the
book is a constant $10 per book. Compute Total revenue, total cost, and profit at
each quantity. What quantity would a profit-maximizing publisher choose? What
price would it charge?

Price Qty Total Marginal Total cost Profit

demanded revenue revenue
$100 0 novels
90 1
80 2
70 3
60 4
50 5
40 6
30 7
20 8
10 9
0 10

41. Compute marginal revenue. How does marginal revenue compare to the price?

42. Graph the marginal-revenue, marginal cost, and demand curves. At what quantity
to the marginal-revenue and the marginal-cost curves cross? What does that

43. In your graph, shade in the deadweight loss. Explain in words what it means.

44. If the author were paid $200 instead of $100 to write the book, how would this
affect the publisher’s decision regarding the price to charge? Explain.

45. Suppose the publisher was not profit-maximizing but was concerned with
maximizing economic efficiency. What price would it charge for the book? How
much profit would it make at this price?