Question

Q1.        Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not?

Economic profit = Accounting profits minus implicit costs (opportunity costs).

Q3.      Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations:

1. A firm with total revenues of $150 million, explicit costs of $90 million, and implicit costs of $40 million.
2. A firm with total revenues of $125 million, explicit costs of $100 million, and implicit costs of $30 million.
3. A firm with total revenues of $100 million, explicit costs of $90 million, and implicit costs of $20 million.
4. A firm with total revenues of $250,000, explicit costs of $275,000, and implicit costs of $50,000.

Q5.      What distinguishes a firm’s short-run period from its long-run period?

Q7.      What is the difference between fixed cost and variable cost? Does each type of cost affect short-run marginal cost? If yes, explain how each affects marginal cost. If no, explain why each does or does not affect marginal cost.

Q8.      Explain why the marginal cost of production must increase if the marginal product of the variable resource is decreasing.

Q10.    Identify each of the curves in the following graph.

                   

Q11.    Explain why the marginal cost curve must intersect the average total cost curve and the average variable cost curve at their minimum points. Why do the average total cost and average variable cost curves get closer to one another as output increase?

Q12.    In Exhibit 7 in this chapter, the output level where average total cost is at a minimum is greater than the output level where average variable cost is at a minimum. Why?         

Q14.    Explain the shape of the long-run average cost curve. What does “minimum efficient scale” mea

P19.     Complete the following table, where L is units of labor Q is units of output, and MP is the marginal product of labor.

1. At what level of labor input do the marginal returns to labor begin to diminish?
2. What is the average variable cost when Q = 24?
3. What is this firm’s fixed cost?
4. What is the wage rate per day?

                               

P20.     Assume that labor and capital are the only inputs used by a firm. Capital is fixed at 5 units, which cost $100 each. Workers can be hired for $200 each. Complete the following table to show average variable cost (AVC), average total cost (ATC), and marginal cost (MC).

P21.     Suppose the firm has only three possible scales of production as shown below:

                

1. Which scale of production is most efficient when Q= 65?
2. Which scale of production is most efficient when Q =75?
3. Trace out the long-run average cost curve on the diagram.

Chapter Appendix  ‘Production and Cost in the Firm’ - Extra Credit

P1.       Suppose that a firm’s cost per unit of labor is $100 per day and its cost per unit of capital is $400 per day.

1. Draw the isocost line for a total cost per day of $2,000. Label the axis.
2. If the firm is producing efficiently, what is the marginal rate of technical substitution between labor and capital?
3. Demonstrate your answer to part (b) using isocost lines and isoquant curves.

Answer 1

1. Amos McCoy is not currently making an economic profit. Because economic profit is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs is called economic profit. And accounting profit occurs when a firm's total revenue exceeds its explicit costs and implicit opportunity costs of using its own resources. Amos McCoy is not making an economic profit , despite the fact that he is making an accounting profit. This is because that the accounting profit calculation does not take into account an important implicit cost- the opportunity cost of not raising soybeans. Actually, McCoy is experiencing an economic loss. So, he should get out of the corn business and begin growing soybeans. Economic loss = $(200-100)per acre = $100 per acre.

3. (a) Accounting profit = Total revenue - Explicit cost

Economic profit = Accounting profit - Implicit cost

Accounting profit = $(150-90)million = $60 million

Economic profit = $(60-40)million= $20 million.

(b) Accounting profit = $(125-100)million= $25 million

Economic profit = $(25-30)million = -$5 million (i.e economic loss).

(c) Accounting profit = $(100-90)million= $10 million

Economic profit = $(10 -20)million= -$10 million (i.e economic loss).

(d) Accounting profit = $(250,000-275,000)= -$25,000 (i.e accounting loss).

Economic profit = $(-25,000-50,000)= -$75,000 (i.e economic loss).