THEORY OF THE FIRM EXERCISE

Refer to the data provided in Table 8.4 below to answer the following questions.

Table 8.4

1. Refer to Table 8.4. If Scott produces five pairs of shorts, what are his total costs?

2. Refer to Table 8.4. If Scott produces four pairs of shorts, what are his average fixed costs?

3. Refer to Table 8.4. If Scott produces two pairs of shorts, what are his average variable costs?

4. Refer to Table 8.4. If Scott produces four pairs of shorts, what are his average variable costs?

5. Refer to Table 8.4. Assume that Scott Board Shorts is producing in a perfectly competitive
output market. The price of a pair of shorts is $40. To maximize profits, how many shorts
should Scott produce?

6. You spend $15,000 to start an Internet company. You spend an additional $60,000 for raw
materials and labor to produce your product. How much is your fixed cost? How much are
your variable costs? What is your total cost for one year?

7. Your company (Click.com) has low fixed costs but high variable costs. Your competitor's
company (Brick & Mortar) has high fixed costs but low variable costs. Currently both
companies are producing 50 units at the same total cost. How will profits for each company
be affected as more units are produced?

8. In the short run, what happens to the total fixed costs of the firm when production goes up?

9. What do diminishing returns imply about the production process?

10. Martin's Barber Shop faces the following schedule for producing haircuts:

q TFC TVC TC AFC AVC ATC MC

0 15 0 15 ---- ---- ---- ----

1 15 5 20
2 15 11 26
3 15 18 33
4 15 26 41
5 15 35 50

a. Fill in the columns for average fixed cost, average variable cost, average total cost, and
marginal cost.
b. Plot the TFC, TVC, and TC curves on a graph
c. Plot the AFC, AVC, ATC and MC curves on a graph.