EXERCISE FOR CHAPTER 6

1. Choose a definition for each key term

Total revenue Fixed cost

Total cost Variable cost
Profit Average total cost
Explicit cost Average fixed cost
Implicit cost Average variable cost
Economic profit Marginal cost
Accounting profit
Production function
Marginal product
Diminishing marginal product

a. Costs that do not vary with the quantity of output produced _________
b. Total revenue minus total cost ___________
c. The increase in total cost that arise from an extra unit of production _______
d. Input costs that do not require an outlay of money by the firm. Implicit cost
_________
e. The increase in output that arises from an additional unit of input. Marginal
product _________
f. The market value of the inputs a firm uses in production. ________
g. Fixed costs divided by the quantity of output. ________
h. Costs that vary with the quantity of output produced __________
i. The amount a firm receives for the sale of its output. __________
j. The relationship between quantity of inputs used to make a good and the quantity
of output of that good. __________
k. Variable costs divided by the quantity of output. ________
l. Total cost divided by the quantity of output. __________
m. The property whereby the marginal product of an input declines as the quantity of
the input increases. __________
n. Input costs that require an outlay of money by the firm. _________

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2. The table below shows the total product, average product and marginal product for a
firm

Fixed Variable
Factor Factor (TP) (AP) (MP)
(unit) (unit)
1 1 5
1 2 12
1 3 35
1 4 13.2
1 5 65
1 6 12
1 7 10.2
1 8 70

a. Complete the above table.

b. Without scale, sketch the TP, AP and MP in one diagram.

3. The following table shows the daily input and output of a firm.

Land Labor TP AP MP
10 10 100
10 20 18
10 30 15
10 40 14
10 50 560

a. Complete the above table

b. Without scale, sketch a diagram to show the relationship between TP, AP and
MP
c. When does the law of diminishing returns start?

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4. From the table below, answer the following questions.

Number of TP MP
workers
0 0
1 40
2 90
3 126
4 150
5 165
6 174
7 168

a. Diminishing returns sets in which the addition of the _______ worker.

b. The marginal product of the third worker is ______ 36 units.
c. Total product is at its maximum when ______ workers are hired.

5. The table below shows a firm which produces good Y.

Labor TP AP MP
1 8
2 17
3 24
4 30
5 35
6 37
7 38
8 38

a. Complete the table.

b. Sketch the TP, AP and MP in one diagram.
c. Identify the stages of production.
d. For a rational producer, at which stage will he chose to produce? why?
e. At what number of workers which diminishing marginal returns starts?

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6. Complete the table below

Q FC VC TC AFC AVC AC MC
0 10 0
1 55
2 75
3 90
4 110
5 135
6 170
7 220
8 290

7. The following table shows the product schedule of MOM Corporation, which
produces electronic items. Suppose that the workers are variable inputs and the
machines used are fixed input in this production. Based on the given information,
answer the questions.

Workers Total Product Marginal Product

0 0 -
1 25 25
2 85 60
3 125 40
4 155 30
5 165 10
6 155 -50

a. Calculate the marginal product of each level of workers.

b. When might the firm experience the law of diminishing marginal returns?
c. The marginal product schedule starts to be negative by the __ __ worker.

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8. The number of motorcycles assembled in a factory depends on the number of
workers as follows:

Workers Number of motorcycles

assembled

0 0
1 4
2 12
3 22
4 34
5 44
6 49
7 52
8 51
9 46

Assume that all inputs (raw materials, machinery and utilities) other than labor are
fixed in the short run.

a. Add two additional columns to the table and enter the marginal product and
average product for each number of workers.
b. Over what range of labor input are there increasing returns to labor? Diminishing
to labor? Negative returns to labor?
c. Over what range of labor input is marginal product greater than average product?

9. Joe runs a small boat factory. He can make ten boats per year and sell them for
RM25,000 each. It costs Joe RM150,000 for the raw materials (fiberglass, wood,
paint and so on) to build the ten boats. Joe has invested RM400,000 in the factory
and equipment needed to produce the boats: RM200,000 from his own savings and
RM200,000 borrowed at 10% interest (assume that Joe could have loaned his
money out at 10% too). Joe can work at competing boat factory for RM70,000 per
year.

a. What is the total revenue Joe can earn in a year?

b. What are the explicit costs Joe incurs while producing ten boats?
c. What are the total opportunity costs of producing ten boats (explicit and implicit)?
d. What is the value of Joe’s accounting profit?
e. What is the value of Joe’s economic profit?
f. Is it truly profitable for Joe to operate his boat factory? Explain.

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10. Lee is a computer programmer who earned RM35,000 in 2017. But with the new
millennium, Lee decided to try a new career. He loves water sports and in 2018 he
opened a body board manufacturing business. At the end of the first year of
operation, he submitted the following information to his accountant:

i. He stopped renting out his seaside cottage for RM3,500 a year and used it
as his factory.
ii. He spent RM50,000 on materials, phone, utilities and etc
iii. He leased machines for RM10,000 a year.
iv. He paid RM15,000 in wages.
v. He used RM10,000 from his savings account at the bank, which pays 5% a
year interest.
vi. He borrowed RM40,000 at 10% a year from the bank.
vii. He sold RM160,000 worth of body boards.
viii. Normal profit is RM25,000 a year

a. Calculate Lee’s explicit costs

b. Calculate Lee’s implicit costs
c. What does the accountant calculate for Lee’s profit?

11. Differentiate between fixed cost and variable cost.

12. With a diagram, explain the stage of production in the short run and how the
diminishing marginal return occurs.
13. With diagram, explain the relationship between ATC, AVC and AFC in the short
run.
14. Differentiate between implicit cost and explicit cost.