Intermediate Microeconomics EC202

Lekima Nalaukai Semester II, 2020

Tutorial 7 Suggested Solutions

Chapter 8

Part A
1. When the long-run average cost curve is u-shaped, the marginal cost curve will bisect (intersect)
the average cost curve at __________________.
A. its maximum
B. its minimum
C. its average value
D. none of the above

2. Average cost in the long-run is defined as _____.

A. VC/Q
B. TC/Q
C. VC + FC/Q
D. none of the above

3. If a company has $1000 in variable costs and $200 in fixed costs when it produces 200 units of
output and sells the units for $20 per unit, average total costs would equal ______.
A. $10
B. $6
C. $50
D. $60

4. Economies of scale is a characteristic of production where ______.

A. average costs increase as output increases
B. total cost decreases as output increases
C. average cost decreases as output increases
D. average cost decreases as output decreases

5. In the short run, if a business observes a change in the cost of a fixed factor of production, the
business would _______.
A. reduce costs
B. increase output
C. not make any changes
D. decrease output
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 7 Suggested Solutions

Chapter 8

6. A production characteristic in which the total cost of producing given quantities of two goods in
the_________________________.
A. same firm is less than the total cost of producing those quantities in two multi-product firms
is called economies of scope
B. same firm is less than the total cost of producing those quantities in two single-product
firms is called economies of scope
C. same firm is less than the total cost of producing those quantities in two single-product firms
is called economies of scale
D. same firm is less than the total cost of producing those quantities in two multi-product firms
is called economies of scale
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 7 Suggested Solutions

Chapter 8

Part B
1. What is the relationship between the solution to the firm’s long-run cost-minimization problem
and the long-run total cost curve?

The long-run total cost curve plots the minimized total cost for each level of output holding input
prices fixed. In other words, for a given set of input prices, the long-run total cost curve represents
the total cost associated with the solution to the long-run cost minimization problem for each level
of output.

2. Explain why an increase in the price of an input typically causes an increase in the long-run total
cost of producing any particular level of output.

When the price of one input increases, the isocost line for a particular level of total cost will rotate
in toward the origin. Assuming the isocost line was tangent to the isoquant for the firm’s selected
level of output, when the isocost line rotates it will no longer touch the original isoquant. In order
for an isocost line to reach a tangency with the original isoquant, the firm would need to move to
an isocost line associated with a higher level of cost, i.e. an isocost line further to the northeast.

3. How would an increase in the price of labor shift the long-run average cost curve?

An increase in the price of labor would result in a long-run total cost curve that lies above the
initial long-run total cost curve at every quantity except Q  0 . Since AC  TC / Q , increasing
total cost will raise average cost at every quantity except Q  0 . Therefore, the long-run average
cost curve will shift up.
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 7 Suggested Solutions

Chapter 8

Part C
1. The following incomplete table shows a firm’s various costs of producing up to 6 units of output.
Fill in as much of the table as possible. If you cannot determine the number in a box, explain why
it is not possible to do so.

It helps to rewrite this table adding an extra column for Total Fixed Costs at each level of output.
The TFC for Q = 2 is just 2*30 = 60, and this is also the TFC value for every other output level.
Then for Q = 1, we know TC = AC*Q = 100, TVC = TC – TFC = 40 and the rest is straightforward.
Similarly we can fill in the rows for Q = 2, 3, 4, and 6. For Q = 5, we need to use the fact that
MC(6) = TC(6) – TC(5) to infer TC(5) = 250. The rest is straightforward.

Q TC TVC AFC AC MC AVC TFC

1 100 40 60 100 40 40 60

2 110 50 30 55 10 25 60

3 120 60 20 40 10 20 60
4 180 120 15 45 60 30 60

5 250 190 12 50 70 38 60

6 330 270 10 55 80 45 60
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 7 Suggested Solutions

Chapter 8

2. The following incomplete table shows a firm’s various costs of producing up to 6 units of output.
Fill in as much of the table as possible. If you cannot determine the number in a box, explain why
it is not possible to do so.

Q TC TVC TFC AC MC AVC

1 18 8 10 18 8 8

2 30 20 10 15 12 10
3 46 36 10 46/3 16 12
4 66 56 10 66/4 20 16

5 90 80 10 18 24 16
6 118 108 10 118/6 28 18

3. A firm produces a product with labor and capital, and its production function is described by Q =
LK. The marginal products associated with this production function are MPL = K and MPK = L.
Suppose that the price of labor equals 2 and the price of capital equals 1. Derive the equations for
the long-run total cost curve and the long-run average cost curve.

Starting with the tangency condition, we have

MPL w

MPK r
K 2

L 1
K  2L
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 7 Suggested Solutions

Chapter 8

Substituting into the production function yields

Q  LK
Q  L(2 L)
Q
L
2

Plugging this into the expression for K above gives

Q
K 2
2

Finally, substituting these into the total cost equation results in

 Q  Q
TC  2    2  
 2  2
 Q
TC  4  
 2
TC  8Q

and average cost is given by

TC 8Q
AC  
Q Q
8
AC 
Q
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 7 Suggested Solutions

Chapter 8

4. A short-run total cost curve is given by the equation STC(Q) = 1000 + 50Q2. Derive expressions
for the corresponding short-run average cost, average variable cost, and average fixed cost curves.

STC (Q)  1000  50Q 2

STC (Q) 1000
SAC (Q)    50Q
Q Q
AVC (Q)  50Q
1000
AFC (Q ) 
Q