Solution Manual For Essentials of Economics 11th Edition Bradley Schiller Karen Gebhardt

Solution Manual for Essentials of Economics, 11th Edition Bradley Schiller Karen Gebhardt
Solution Manual for Essentials of Economics, 11th

Edition Bradley Schiller Karen Gebhardt
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ANSWERS TO QUESTIONS FOR DISCUSSION AND PROBLEMS
QUESTIONS FOR DISCUSSION
l. Is your school currently producing at capacity (i.e., teaching as many students as

possible)? What considerations might inhibit full capacity utilization? (LO 5-1)
Answer: There may be empty seats in your classroom that indicate unused capacity.
Although it would be impractical to offer classes around the clock, capacity
utilization has increased as many schools have added early morning, night, and
weekend classes to traditional Monday through Friday daytime classes. It is difficult
to enroll the exact number of students to fill up each classroom for every course and
even if it were possible, some students would still drop out of specific classes or even
the school. Due to the nature of our educational system, these students cannot be
replaced during the middle of a semester.
2. What are the production costs of your economics class? What are the fixed costs?
The variable costs? What is the marginal cost of enrolling more students? (LO 5-3)
Answer: The fixed costs are the costs of providing the classroom and its equipment,
some level of utilities, and the prorated share of the university's infrastructure
attributed to this class. The variable costs include the cost of the instructor, materials
(chalk or markers, handouts), and some additional utilities. The marginal cost of
enrolling one more student is nearly zero as long as there is a seat available in the
classroom.
3. Suppose you set up a lawn-mowing service and recruit friends to help you. Would
the law of diminishing returns apply? Explain. (LO 5-2)
Answer: In the short run, yes. As more and more friends helped, there would be
capital constraints such as a limited number of lawn mowers, rakes, etc. Sharing the
tools reduces each worker’s productivity. Also, they might tend to get in each other’s
way and bicker and fuss. The result would be to decrease the output of each added
worker over that of the previous worker.
4. What are the fixed and variable costs of (a) a pizza shop, (b) a corn farm, (c) a movie
theater, (d) Netflix? Which needs the highest sales volume to earn a profit? (LO 5-3)
Answer:
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(a) The fixed costs of a pizza shop include rent on the building (even if they own the
building there is an opportunity cost), insurance, some minimal level of utilities
(for example, for security and signage), ovens and other equipment, delivery cars,
etc. The variable costs of the pizza shop include labor and the cost of the inputs
for making pizza dough and pizza toppings.
(b) The fixed costs of a corn farm include the land, buildings, tractors, combines,
and other equipment. The variable costs of the farm include labor, seeds,
pesticides, irrigation, and related inputs.
( c) The fixed costs of a movie theater include rent on the building (even if they
own the building there is an opportunity cost), insurance, utilities, and equipment
such as projectors and screens. The theater’s variable costs include food for
concessions, labor, advertising, and fees paid to distributors for and creators of
the films, among others.
(d) The fixed costs of Netflix include rent on office space, insurance, utilities, and
the technology needed to service its customers. The variable costs of Netflix
include labor, advertising, and fees paid to distributors of and for creators of the
films and entertainment, among others.
Whichever business has the highest fixed costs needs the highest sales volume to
earn a profit.
5. How do marginal costs “put a brake on production decisions”? (LO 5-3)
Answer: As production increases, marginal costs tend to rise (Law of Diminishing

Returns). Eventually, marginal cost will rise to the level of price, making additional
units of output more expensive to produce than their price.
6. Is it possible for a company to show an accounting profit even while it is incurring an

economic loss? How? What might happen with such a company? (LO 5-5)
Answer: Accounting costs often neglect the opportunity costs of capital. As a result,
accounting profits will exceed economic profits and may even conceal an economic
loss. Such a company is a ripe target for investors who might want to buy it, then
redeploy its assets in more profitable endeavors.
7. Why does marginal physical product decline at a fast-food outlet (e.g. McDonald’s)
when more employees are hired? What are the fixed input constraints that limit
worker productivity? (LO 5-2)
Answer: The law of diminishing returns states that the marginal physical product of
labor declines as more of it is employed with a given quantity of other fixed inputs.
For example, if McDonald’s has one ice cream machine and 6 employees, one of
which is a cook, another that is a cashier, and the other four prepare the side dishes
including the ice cream, space will be tight and still only one ice cream can be
prepared at one time. This “crowding” reduces marginal physical product. Hiring
another worker might not increase ice cream production.
Fixed input constraints at an establishment such as McDonald’s would include food

dispensers such as ice cream machines, cola dispensers, and deep fat fryers. A
limited number of grills, microwaves, and cash registers would also be considered
limiting inputs. Finally, the counter space and space behind the counter also has the
potential to place considerable constraints on worker productivity.
8. If Tesla is planning to increase production at its Fremont, California, factory (News

Wire “Production and Investments Decisions”), what must be the relationship
between marginal cost and price? (LO 5-3)
Answer: For Tesla to be able to increase its production, the price that Tesla is
expecting to receive must at a minimum, cover the marginal cost of increasing
production. However, this is a minimum condition for supplying additional output;
Tesla must be able to receive a price high enough to be able to cover its fixed costs
too – that is, its average total costs – to sustain the increased production.
9. What will be the capacity of Tesla’s Shanghai Gigafactory (News Wire “Production
and Investment Decisions”). How many cars will Tesla want to produce in that
factory? (LO 5-4)
Answer: Tesla’s factory in Shanghai will have the capacity to produce 500,000 cars
per year plus enough lithium-ion batteries to power the cars. Tesla will want to
produce the number of cars that will allow it to cover, at a minimum, its marginal
cost – but it will need to cover its fixed costs, too, to sustain the increased
production.
10. POLICY PERSPECTIVES If capital investment ceased, what would happen over time to
worker productivity and living standards? (LO 5-1)
Answer: The U.S. labor force continues to grow by more than a million workers each
year. Capital investment stimulates each and every worker’s productivity. If capital
investments don’t keep pace or, even worse, they cease, these added workers would
strain production facilities. The law of diminishing marginal product (decreased
worker productivity) would push wages lower and reduce living standards.
PROBLEMS
1) (a) What is the marginal physical product of each successive worker in Figure 5.1?
For which worker is marginal physical product (b) first diminishing? (c) zero? (LO 5-2)
Answer:
(a) Marginal physical product (MPP) is the change in total output associated with
one additional unit of input. In our example, marginal physical product is the
extra output obtained by hiring one more worker. It is calculated as the
change in total output (quantity) divided by the change in the number of
workers.
MPP of the first worker = (total output with the first worker – total
output of no workers)/(one more worker) = (15 – 0)/1 = 15
MPP of the second worker = (total output with the second worker –
total output of first worker)/(one more worker) = (34 – 15)/1 = 19
MPP of the third worker = (total output with the third worker – total
output of second worker)/(one more worker) = (44 – 34)/1 = 10
MPP of the fourth worker = (total output with the fourth worker –
total output of third worker)/(one more worker) = (48 – 44)/1 = 4
MPP of the fifth worker = (total output with the fifth worker – total
output of fourth worker)/(one more worker) = (50 – 48)/1 = 2
MPP of the sixth worker = (total output with the sixth worker – total
output of fifth worker)/(one more worker) = (51 – 50)/1 = 1
MPP of the seventh worker = (total output with the seventh worker –
total output of sixth worker)/(one more worker) = (51 – 51)/1 = 0
MPP of the eighth worker = (total output with the eighth worker –
total output of seventh worker)/(one more worker) = (51 – 47)/1 = –4
(b) The relative scarcity of other inputs (capital and land) constrains the marginal
physical product of labor and eventually causes it to diminish. The law of
diminishing returns states that the MPP of a variable input declines as more
of it is employed with a given quantity of other (fixed) inputs. In this case, the
MPP first diminished with worker number 3.
(c) According to the table, the MPP of worker number 7 is zero.
2) (a) Compute average fixed costs and average variable costs in Figure 5.3 for all rates
of output. (LO 5-3)
At what rate of output is (are)
(b) average fixed costs the lowest?
(c) average variable costs the lowest?
(d) average total cost the lowest?
Answer:
(a)
Rate
Fixed Average Fixed Variable Average Variable Total Average
of
Costs Costs Costs Costs Cost Total Cost
Output
0 $120 -- $0 0 $120 --
10 120 $12.00 85 $8.50 205 $20.50
15 120 $8.00 125 $8.33 245 16.33
20 120 $6.00 150 $7.50 270 13.50
30 120 $4.00 240 $8.00 360 12.00
40 120 $3.00 350 $8.75 470 11.75
50 120 $2.40 550 $11.00 670 13.40
51 120 $2.35 633 $12.41 753 14.76
Average fixed cost is fixed cost divided by output [= (fixed cost)/(output)].
When the rate of output is 10, average fixed cost is $12 (= $120/10 units). When
the rate of output is 15, average fixed cost is $8 (= $120/15 units), and so on.
Average variable cost is variable cost divided by output [= (variable

costs)/(output)].
When the rate of output is 10, average variable cost is $8.50 (= $85/10 units).
When the rate of output is 15, average variable cost is $8.33 (= $125/15 units),
and so on.
(b) According to the table, average fixed costs are lowest where the rate of
output is 51 units and average fixed cost is $2.35. Note that average fixed
cost always falls with increased output.
(c) Average variable costs are lowest where the rate of output is 20 units and
average variable cost is $7.50.
(d) Average total costs are lowest where the rate of output is 40 pairs and
average total cost is $11.75.
3) (a) Complete the following table; (b) then plot the marginal cost and average total
cost curves on the same graph. (c) What output has the lowest per-unit cost? (d)
What is the value of fixed costs? (LO 5-3)
Rate of Total Cost Marginal Cost Average
Output Total Cost
0 $80 -- --
1 $90 ___ ___
2 $100 ___ ___
3 $120 ___ ___
4 $160 ___ ___
5 $250 ___ ___
Answer:
(a)
Rate of Total Cost Marginal Cost Average
Output Cost
0 $80 -- --
1 $90 $10 $90
2 $100 $10 $50
3 $120 $20 $40
4 $160 $40 $40
5 $250 $90 $50
Table: Marginal cost is the increase in total cost associated with a one-unit increase
in production. It is calculated as the change in total cost divided by the change in
output [= (TC2 – TC1)/(Q2 – Q1)]. For example, the first unit of output has a marginal
cost of $10 [= ($90 – $80)/(1 – 0)], the second unit has a marginal cost of $20 [=
($100 – $90)/(2 – 1)], and so on. Average total cost (ATC) is total cost divided by the
quantity produced. In this case, ATC for the first unit is $90 (= $90/1), ATC for the
second unit is $50 (= $100/2), and so on.
(b) ATC is at a minimum at 4 units of output and a per-unit cost of $40.00.
(c) Fixed costs are the costs of production that do not change when the rate of
output is altered, e.g., the cost of basic plant and equipment. Recall that total
costs equal fixed cost plus variable cost. If there is no output produced
(output = 0), variable cost = 0. Fixed costs are the costs that exist when
output is zero, in this instance, $80.
(d) Graph: The two curves (marginal cost and average cost) are plotted on the
graph. For example, a point on the marginal cost curve is when Q = 1 then
MC = $10, when Q = 2 then MC = $20, and so on. The average cost curve is
plotted in a similar way.
4) Suppose the mythical Tight Jeans Corporation leased a second sewing machine,
giving it the following production function: (LO 5-1)
Number 0 1 2 3 4 5 6 7 8
of
workers
Quantity 0 10 36 56 68 74 76 76 74
of
output
(a) Graph the production function.
(b) On a separate graph, illustrate marginal physical product.
At what level of employment does
(d) the law of diminishing returns become apparent?
(e) MPP hit zero?
(f) MPP become negative?
Answer:
(a) The marginal physical product is the change in output when one more
worker is hired. It is calculated as (Q2 – Q1)/(L2 – L1). For example, when one
worker is hired the marginal physical product is 10 [= (10 – 0)/(1 – 0)], when
a second worker is hired the marginal physical product is 26 [= (36 – 10)/(2 –
1)], and so on.
Number 0 1 2 3 4 5 6 7 8
of
workers
Quantity 0 10 36 56 68 74 76 76 74
of
output
Marginal -- 10 26 20 12 6 2 0 -2
Physical
Product
(b) The production function is plotted with “quantity of output” on the vertical
axis and “number of workers” on the horizontal axis. One point along the
production function is 10 pairs of jeans and 1 worker (10, 1). A second point
along the production function is 36 pairs of jeans and 2 workers (36, 2). The
rest of the production function is plotted in the same manner.
(c) The marginal physical product curve is plotted with “marginal physical
product” on the vertical axis and “number of workers” on the horizontal
axis. One point along the MPP curve is 10 pairs of jeans and 1 worker (10,
1). A second point along this curve is 26 pairs of jeans and 2 workers (26, 2).
(d) The law of diminishing returns states that the marginal physical product
(MPP) of a variable input declines as more of it is employed with a given
quantity of other (fixed) inputs. According to the table, the MPP declines
with the third worker. An MPP of 20 for the third worker is less than an MPP
of 26 for the second worker.
(e) According to the table provided, MPP is zero for the seventh worker.
(f) The MPP for the eighth worker is –2.
5) Using the data in problem 4 and a price of $30 per pair of jeans, calculate the
marginal physical product and the value of the marginal physical product. Note the
value of the marginal physical product is the price of the product multiplied by the
marginal physical product. (LO 5-3)
Answer:
The marginal physical product (MPP) is the change in output when one more
worker is hired. It is calculated as the change in output divided by the change in
the number of workers [= (Q2 – Q1) ÷ (L2 – L1)]. For example, when hiring the
third worker, the MPP is 20 [= (56 – 36) ÷ (3 – 2) = 20 ÷ 1].
The value of the MPP is price times the MPP (= price × MPP). For example, the
MPP for the third worker is 20 and the price per pair of jeans is $30, yielding a
value of $600 (= 20 × $30). The MPP for the seventh worker is zero, which yields
a value of $0 (= 0 × $30).
6) Using Figure 5.3 as a guide, as a guide, compute total profits at a price of $15 per
pair of jeans and output of (a) 40 pairs, and (b) 50 pairs. (LO 5-3)
Answer:
Total profit is equal to total revenue minus total cost (Profit = TR – TC). Total
revenue is price multiplied by quantity (TR = P × Q). Total cost is given in the
table.
(a) Total profit is $130 when price is equal to $15 and output is equal to 40.
Profit = TR – TC = (P × Q) – TC = ($15 × 40) – $470 = $600 – $470 = $130
(b) Total profit is $80 when price is equal to $15 and output is equal to 50.
Profit = TR – TC = (P × Q) – TC = ($15 × 50) – $670 = $750 – $670 = $80
7) Suppose a company incurs the following costs:
Labor $800
Equipment $400
Materials $300
It owns the building, so it doesn’t have to pay the usual $900 in rent
Solution Manual for Essentials of Economics, 11th Edition Bradley Schiller Karen Gebhardt
(a) What is the total accounting cost?
(b) What is the total economic cost?
(c) How would accounting and economic costs change if the company sold the
building and then leased it back? (LO 5-5)
Answer:
(a) Accounting costs include dollar costs only (those explicit costs) and ignore
any resource use that doesn’t result in an explicit dollar cost. These explicit
costs include the checks written for the labor, equipment, and materials,
which total to $1,500 (= $800 + $400 + $300).
(b) Economic costs include the value of all resources used to produce a good or
service. This includes all explicit costs plus implicit costs, which total $2,400
(= $1,500 explicit costs totaled in part (a) + $900 implicit cost in rent).
(c) Accounting costs would increase by the amount of the lease because the
lease payment is now an explicit dollar outlay. Accounting costs now total
$2,400 (= $800 + $400 + $300 + $900). Economic costs already include the
true costs of the building use and would therefore not change.
8) POLICY PERSPECTIVES If investment in new machinery doubles the productivity of

every worker, what will the MPP of the fifth worker in Figure 5.1 be? (LO 5-4)
Answers:
The marginal physical product of the fifth worker is 2 pairs of jeans (= 50 – 48). If
productivity for this worker doubled, productivity would increase to 4 pairs of jeans
(= 2 × 2).
9) POLICY PERSPECTIVES If the world’s population is growing by 1 percent a year, (a) how fast
does production have to increase to keep living standards from falling? (b) Will living
standards rise, fall, or stay the same if the workforce and productivity (MPP) also increase by
1 percent each year? (LO 5-1)
Answer:
(a) Living standards will be maintained if the economy's production keeps up
with its population growth. In this example, since population is growing at 1
percent, living standards will be maintained if the increase in production is
also equal to 1 percent.
(b) Marginal physical product is the change in total output that occurs when
workers are added. If population, workforce, and MPP are all rising at the
same rate, living standards would be maintained.
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Solution Manual for Essentials of Economics, 11th Edition Bradley Schiller Karen Gebhardt

Solution Manual for Essentials of Economics, 11th

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QUESTIONS FOR DISCUSSION

l. Is your school currently producing at capacity (i.e., teaching as many students as

5. How do marginal costs “put a brake on production decisions”? (LO 5-3)

Answer: As production increases, marginal costs tend to rise (Law of Diminishing

6. Is it possible for a company to show an accounting profit even while it is incurring an

Fixed input constraints at an establishment such as McDonald’s would include food

8. If Tesla is planning to increase production at its Fremont, California, factory (News

(c) According to the table, the MPP of worker number 7 is zero.

At what rate of output is (are)

(b) average fixed costs the lowest?

(c) average variable costs the lowest?

(d) average total cost the lowest?

Average fixed cost is fixed cost divided by output [= (fixed cost)/(output)].

Average variable cost is variable cost divided by output [= (variable

Rate of Total Cost Marginal Cost Average

Output Total Cost

1 $90 ___ ___

2 $100 ___ ___

3 $120 ___ ___

4 $160 ___ ___

5 $250 ___ ___

Rate of Total Cost Marginal Cost Average

1 $90 $10 $90

3 $120 $20 $40

4 $160 $40 $40

5 $250 $90 $50

(b) ATC is at a minimum at 4 units of output and a per-unit cost of $40.00.

(a) Graph the production function.

(b) On a separate graph, illustrate marginal physical product.

At what level of employment does

(d) the law of diminishing returns become apparent?

(e) MPP hit zero?

(f) MPP become negative?

(f) The MPP for the eighth worker is –2.

Profit = TR – TC = (P × Q) – TC = ($15 × 40) – $470 = $600 – $470 = $130

Profit = TR – TC = (P × Q) – TC = ($15 × 50) – $670 = $750 – $670 = $80

7) Suppose a company incurs the following costs:

(a) What is the total accounting cost?

(b) What is the total economic cost?

8) POLICY PERSPECTIVES If investment in new machinery doubles the productivity of

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1 $90 _ _

2 $100 _ _

3 $120 _ _

4 $160 _ _

5 $250 _ _