Solution chapter 10

Answers of Questions
(1)
Explicit costs
Money payments a firm makes to outside suppliers of resource.
Example: salaries
College explicit cost: fee
Implicit cost
Opportunity costs associated with firm’s own cost.
Example: entrepreneurial ability
College implicit cost: bus fair, monetary punishments,

(2)
Normal profit is the implicit cost of entrepreneur.
Accounting profit is total revenue less explicit costs.
Economic profit is total revenue less all implicit costs and explicit costs including normal profit.
In economic profit all resources (land, labour, capital and entrepreneurial ability) are involve. But in accounting
profit entrepreneurial ability is excluded.

(3)
a. long run b. short run c. short run d. short run

(4)

Inputs of Total Marginal Average

labor product product product

0 0 ____ ____
1 15 15 15
2 34 19 17
3 51 17 17
4 65 14 16.25
5 74 9 14.8
6 80 6 13.34
7 83 3 11.85
8 82 -1 10.25

See the table above.

MP is the slope—the rate of change—of the TP curve. When TP is rising at an increasing rate, MP is positive and rising.
When TP is rising at a diminishing rate, MP is positive but falling. When TP is falling, MP is negative and falling. AP
rises when MP is above it; AP falls when MP is below it.
MP first rises because the fixed capital gets used more productively as added workers are employed. Each added worker
contributes more to output than the previous worker because the firm is better able to use its fixed plant and equipment.
As still more labor is added, the law of diminishing returns takes hold. Labor becomes so abundant relative to the fixed
capital that congestion occurs and marginal product falls. At the extreme, the addition of labor so overcrowds the plant
that the marginal product of still more labor is negative—total output falls.
This is illustrated by a diagram that looks like Figure 6-6. Because labor is the only variable input and its price (its wage
rate) is constant, MC is found by dividing the wage rate by MP. When MP is rising, MC is falling; when MP reaches its
maximum, MC is at its minimum; when MP is falling, MC is rising.
 (5)
The distinction between variable resources and fixed resources can be made in short run because in short run plant size is
fixed and payments related to this (insurance, depreciation on equipment etc.) are fixed. While payments relating output
is variable.
Advertising expenditures: variable costs. Fuel: variable costs. Interest on company-issued bonds: fixed costs.
Shipping charges: variable costs. . Payments for raw materials: variable costs. Real estate taxes: fixed costs.
Executive salaries: fixed costs. Insurance premiums: fixed costs. Wage payments: variable costs.
Sales taxes: variable costs. Depreciation and obsolesce charges: fixed costs. Rental payments on leased
Office machinery: fixed costs.
In long run plant size can be increase or decrease that’s why all payments involved can vary.

(6)
Fixed and variable costs associating and owing an automobile
Fix: Depreciation expense on automobile, driver salary, insurance premium
Variable: Fuel, parking, tool tax and maintenance expense.
I’ll prefer travelling by air.
By Car
Fix: Depreciation expense on automobile, driver salary, insurance premium
Variable: Fuel, parking, tool tax and maintenance expense.
By Air
Fix: Ticket cost Variable: Taxi fare
Travelling by road may include implicit cost of self driving.

(7)
(b)

Total Total Average Average Average Margina

Total fixed variable Total fixed variable total l
product cost cost cost cost cost cost Cost

0 $ 60 $ 0 $60 $ $_____ $_____

1 60 45 105 60 45 105
2 60 85 145 30 42.5 72.5
3 60 120 180 20 40 60
4 60 150 210 15 3705 52.5
5 60 185 245 12 37 49
6 60 225 285 10 37.5 47.5
7 60 270 330 8.58 38.57 47.5
8 60 325 385 7.58 40.63 48.13
 9 60 390 450 6.67 43.3 49.97
10 60 465 525 6.00 46.5 52.5

Marginal Cost: are 45, 40, 35, 30, 35, 40, 45, 55, 65, and 75 respectively.
(c)
If TFC has been $100 instead of $60, the AFC and ATC curves would be higher—by an amount equal to
$40 divided by the specific output. Example: at 4 units, AFC = $25.00 [= ($60 + $40)/4]; and
ATC = $62.50 [= ($210 + $40)/4]. The MC curve is not affected by changes in fixed costs.

If TVC has been $10 less at each output, MC would be $10 lower for the first unit of output but remain the
same for the remaining output. The ATC curve would also be lower—by an amount equal to $10 divided
by the specific output. Example: at 4 units of output, ATC = $50 [= ($210 - $10)/4]. The AFC curve
would not be affected by the change in variable costs.
(8)
(a) MC no change; AVC no change; AFC shift down; ATC shift down.
(b) MC shift up; AVC shift up; AFC no change; ATC shift up.
(c) MC shift down; AVC shift down; AFC no change; ATC shift down.
(e) MC shift up; AVC shift up; AFC no change; ATC shift up.
(9)
(a) To produce 60 units, the firm will choose plant size #1, since its ATC is lower for this size firm in producing
less than 80 units.
(b) To produce 100 units, the firm will choose plant size #2, since its ATC is lower for size #2 in producing
between 80 and 240 units.
(c) To produce 230 units, the firm will choose plant size #2, since its ATC is lowest for producing between 80
and 240 units.
(d) To produce 250 units, the firm will choose plant size #3, since its ATC is lowest for production of more than
240 units.
(10)
 The long-run ATC curve is U-shaped. At first, long-run ATC falls as the firm expands and realizes
economies of scale from labor and managerial specialization and the use of more efficient capital. The
long-run ATC curve later turns upward when the enlarged firm experiences diseconomies of scale,
usually resulting from managerial inefficiencies.
 The MES (minimum efficient scale) is the smallest level of output needed to attain all economies of scale
and minimum long-run ATC.
 If long-run ATC drops quickly to its minimum cost which then extends over a long range of output, the
industry will likely be composed of both large and small firms. If long-run ATC descends slowly to its
minimum cost over a long range of output, the industry will likely be composed of a few large firms. If
long-run ATC drops quickly to its minimum point and then rises abruptly, the industry will likely be
composed of many small.

(11)
Sunk costs are those costs which can’t be benefitted and returned.
These costs are to be bear at each cost.
Example: Fraud by prepaid vendor.

Problems
(1)
Explicit cost= 13000+5500+21500
=40000
Implicit cost =5500+19000+2500
 =27000
A.P = 75000-40000
=35000
Economic profit =75000-40000-27000
=8000

(2)
Comp. cost =$100
Pay each worker =$25
No. of laborT. inventory
1 100
2 150
3 200
Total cost = 100+25=125
Inventory 1 worker =100

AP=TC/inv. 1 worker
125
= /100
=$1.25 per inventory
Total cost =100+50=150
Inventory 2 worker =150
150
= /150
=$1 per inventory
Total cost =100+75=175
Inventory 3 worker =200
175
= /200
=$0.875 per inventory
3rd comp. will be adopted that costs $0.875
(3)
Rent = 600000
Wages = 1250000
TFC =1850000

MC of printing = .25
MC of delivery= .10
Sum of MC/AVC = .35
AFC at 1000000 = 1850000/1000000
=1.85
AFC at 800000= 1850000/800000
=2.3125
MC will remain same.

ATC = AFC+AVC
=2.3125+.35
=2.6625
=2.7

(4)
Cost per mile = 10000
Cost of 1st fence = 4*10000
=40000
Cost of 4th fence= 40000*4
=160000
Cost of 2 fence=10000*8
=80000